Models Are Useful Until They Are Not
Matt Church of Thought Leaders Global recently stated “Models are useful until they are not.” This comment has provoked some thoughts for me.
This statement is probably best illustrated by the financial services industry which has lead to the global financial crisis of 2008 and 2009 relied on some investment models, but unfortunately could not see when they were of no use.
In business (be it small or large) we can get trapped into relying on a model of business, a model of how they service their customers, a model of how what services and products they provide and don’t realise when they are no longer useful.
Within a business people can get trapped with respect to their understanding of various aspects of their business eg. customers. They may have three years ago had an exact picture of what their customers looked like, where they shopped, how they shopped, how they behaved, what the decisions were that they were making, but is that model of their customer still the case today? Or have the customer’s behaviours changed and altered in some way that the business needs to adjust for?
Models are useful until they are not.
When do we recognise when the model that we are operating under is no longer useful? The business needs to have a culture of constantly looking for new information that would enhance their way of operating or mean that they need to change what they are doing. The management of the business needs to have the attitude of being able to be willing to explore all possibilities, to watch the information, but they need to be willing to measure and review the necessary information. If the information that you are looking at is the profit and loss statement and balance sheet, then that’s useless; it gives you no understanding of whether the model under which you are operating needs to change. You need to have a complete and detailed understanding of your customer and exactly know what they are doing to determine whether the model you are operating under is useful.
So models are useful until they are not. Is the model that you are operating under still useful?
By the way I am a Mentor at Thought Leaders Global. If you want to know more individual or organisational thought leadership then please contact me.
Photo:- by woodleywonderworks
How to use metrics to stay focused within a vision.
The secret to stay focused within a vision is to find metrics that make your achievements seem small.
This may seem a little crazy. Often we want to celebrate our and our teams achievements. We don’t want people to lose heart in the goal. So there is a balance to be achieved here.
We can have the various goals that reward and motivate performance along the path but also never lose sight of the vision.
To this end I heard a senior executive of Pandora Radio www.pandora.com stating that despite their magnificent growth figures they still only had about 2% of the total radio hours in the USA. So the metrics of growth, number of new subscribers were motivating metrics along the path but the overall metric of share of radio hours keeps them focused on their long term vision. If there was not the metric of radio hour share then they could be distracted by their achievements. It could lead to complacency.
It is still necessary to celebrate the progress but also staying focused on the vision is important.
What metric do you have to make your achievements seem small and keeps you focused within a vision?
Photo by:- Krisph
Are We Asking the Right Questions?
Often in business we are questioning how we undertake the operations of the business, we question the available financial data, we put questions around the efficiency of the team and the processes, but are these the right questions?
The questions that we need to be asking are those that are focused on the value being provided to the customer.
We need to be determining what the customer see’s as important, how the customer defines success, what the customer thinks of our business. From this information we can then ask the questions of what data or metrics do we need to have to ensure that we are able to provide this value to the customer.
Just because the data is available, just because the financial information is being compiled on a regular basis, does not mean that that is useful information. We need to have the one focus measure and the various support measures that are answering the questions about what value is being provided to the customer.
This usually means that the financial data that we are compiling for monthly accounts etc is not the main focus area. This is useful information, but it’s telling us what has gone on in the past. We need to be asking the questions about what the customer is doing in the future, and having the data that gives us an insight into this.
Are you asking the right questions? Do you have the one measure clearly identified that will drive the future value of the business.
Photo: – by fontplay.com
Stop Chasing Profits
In business we are always told to focus on the bottom line. For instance – ‘the bottom line is all that matters’ etc
I believe that this focus is wrong.
The persistent focus on the bottom line can lead to poor decisions being made. Activity for the sake of activity could be happening, inefficiencies could be allowed to continue, unprofitable services/products/or customers could still be provided, but the bottom line still be healthy. Focusing on profit does not tell us the story about what is happening to cashflow, customers, or employees.
It is not uncommon to hear “We have been profitable, but I don’t know where the cash is.” All of these comments and issues are symptoms on the focus being purely on the profit. Obviously we can’t ignore profit, but we need to stop being primarily focused on the bottom line.
At the end of the day the profit and loss statement is a history statement, it is a statement of decisions made by the business and by its customers in the past. There is a story to be told, the numbers do talk. But it is a story of what has gone on in the past.
Also connected to this is what period and how soon after the end of the period are we looking at, when we are looking at profit? That is if the profit and loss statement is for the year ended 31 Dec and we are looking at in February then it is late and the somewhat irrelevant.
The profit and loss statement is only of use if we are looking at it very soon after the end of the period. It will soon become ancient data and decisions made on the basis of the profit could well be wrong based on where the customer has moved to.
We need to be collecting information that informs us as to where the future of the business is going. This is through the use of ‘lead indicators’ or ‘metrics’, indicators that illustrate the value being built or that is driving the current performance of the business.
Chasing profits can lead to poor decisions. Stop chasing profits.
How are you keeping the score?
In Brisbane we have enjoyed the Brisbane International Tennis Tournament. It is part of the world tennis circuit and is one of the lead up tournaments to the Australian Open held in Melbourne this week.
We went to the tennis arena to watch some of the matches which was most enjoyable. The thing that is quite obvious though (in watching any sporting match, but lets just for the minute focus on the tennis) is the use of a scoreboard. The tennis scoring system dates back to when the date when the game was founded and has some little quirks, but anybody new to the game after a short explanation will understand how each game is scored; from 15, to 30, to 40, potentially ‘deuce’, to ‘game’. Then the first to 6 games (subject to tiebreak situation) wins a set. The matches are best of 3 or 5 sets. (Obviously there are many nuances in the scoring of tennis which I wont go into.
My point is that the scoreboard clearly shows the progress of the match. It is very clear to all, the players, the spectators what the score is and what has happened.
Is this the case in your business?
Do you have a scorecard that is simple to understand? A scoreboard that after a short explanation everybody can understand? Can everybody understand how the business makes money?
There would not be many variables that the scoreboard would measure. It must be easily understood and relevant. There may be separate scoreboards for separate divisions or areas of the business.
FedEx use a system whereby they have what they call a ‘Hierarchy of Horrors’. These are all the things that could go wrong in dealing with their customers. All parcels are tracked to determine how their service ranked against this hierarchy of horrors and an index which they call a ‘Service Quality Index’ is kept. Every morning this service quality index is emailed out to every office. Everybody knows from this index how FedEx is going.
Yes, they have quite a sophisticated IT solution and for any small business, they could not hope to emulate the same sort of scoreboard, but the point is that they have considered what actually matters to the customer and developed a scoreboard around that. It is something that everybody in the business has input into and I believe that a system of a scoreboard that everybody understands is important to manage the business.
There are other things to lead the business, but from the management view point, we need to (like the tennis) have a scoreboard that is simple and relevant for all.
Picture – Richard Fisher
Some observations on achieving superb team performance
Getting performance from any group of people means a permanent change in the way they think and operate a business. To achieve this permanent change it is necessary to consider some aspect of human behaviour.
People want to be great. If they aren’t it’s because management won’t let them be. People do not generally intentionally set out to do a bad job. This usually only comes about when the culture has turned sour.
Performance begins with each individual’s expectations. Influence what people expect and you influence how people perform.
Expectations are driven partly by goals, vision, symbols, metrics and partly by the context in which people work. That is by such things as the pay structure, incentives, operating practices and importantly decision making structures.
The actions of managers shape expectations.
Learning is a process, not a goal. Each new insight creates a new layer of potential insights.
The organisation’s results reflect the individual and the individuals performance. If you want to change the results, you have to change yourself first.
To make changes that will lead to great performance focus on goals, expectations, contexts, actions and learning. The leadership responsibility is to establish the conditions which superb performance serves both the company’s and the individuals best interests.
Unintended consequences of how sales people are paid.
Recently Ingrid Cliff of Heart Harmony (a great copywriter) wrote of her experience in buying a car on her blog. She had narrowed the choice down to types – Mazda 6 and Toyota Camry. However upon going to the Mazda dealership she had the following experience -
“He was selling beautifully till he sat us down. We told him we wanted to buy in the next week, we would be paying cash and wanted his best price so we could make a decision which way to go – Camry or Mazda. He wandered off to see the boss, came back and told us that he wouldn’t give us a price now as we were not serious, but when we were serious next week to come back and see him. He gave us a rough ballpark figure on the new car with the options we were looking for (after being pressed for the info).”
A number of years I had a similiar experience. As you can guess Ingrid did not buy from that dealership and I did not buy from the dealership were I had a similiar experience.
Why do some car dealers adopt this approach?
Now there are likely to be a number of reasons, one of which is a complete lack of understanding of customer service and also their belief of how to force a sale. However I believe that a significant contributing problem is how sales people at dealerships are paid.
The industry standard is for the majority of their package to be commission based. The logic of this is that the sales people will highly motivated to close the sale which will deliver results to the dealership. The dealership do not want their sales people standing around or wasting their time so the incentive system is used to show what is important and to motivate them. The trouble is the sales person that Ingrid met was doing exactly what the incentive system told him to do. The sales person did not waste time with a potential customer who was not going generate commission immediately.
But the dealership having spent money on advertising and marketing to get people into the showroom I am sure they would want to build a relationship with all customers so as to do with business over the long term. The management probably did not have the attitude of making the sale immediately. The commission based pay structure used to motivate the team is causing a business result which does not lead to loyal long term customers.
Another issue that the commission pay structure undoubtly has an impact on, is who is attracted to become a car salesperson. I have seen dealerships advertising sales positions highlighting the fact that a successful person can earn significant income. This will attract a certain personality to the business but is that the personality the business should have. If the business wants to deliver a great standard of customer service and build loyal customers then the incentive system will recruit people who are after the sale now.
Whats the point? The point is that pay structures with financial incentives can have unintended consequences. It will create certain behaviour but it is not necessarily behaviour which the organisation may want. Be careful about designing commission and other financial incentives as part of employee renumeration. If the car dealer want’s more loyal clients then it could be radical and remove this commission structure. There are car dealers who are going down this path. We need to carefully design our metrics and compensation systems to ensure it matches the strategic objectives of the business.
Remember be careful what you ask for as you may just get it.
“Not everything that you can count, actually counts’
Einstein is credited with this quote. He as usual was completely correct.
In the 1750′s Jedediah Buxton was taken to see Shakespeares Richard III performed by David Garrick at the Drury Lane Theatre. At the conclusion upon being asked his opinions he answer that there were 12445 words. He missed the point though his word count was accurate.
This is very applicable to business. I was just reading of person who said in the organisation she worked for she had the responsibility for 137 Key performance indicators. She went onto to say that she only concentrated on 7 but those 7 may not necessarily be what her management focused on. 137 KPI’s show an organisation that is counting everything they can count.
It seems that business can lose sight of what the role of metrics in an organisation is.
These metrics are are known as KEY performance indicators. Something is key when it is of fundamental importance to the business. It is key if it is a make or break, the difference between success or failure. There is no way that the 137 KPI’s are all key to the businesses success.
The success that needs to be considered is that which is important in the eye’s of the customer. We need to define success the way the customer does. This means that we need to completely understand the customer. What is it that they like and hate about your organisation? Often the core product or service is not what the customers sees as the value from dealing with your organisation. It is usually a number of little items that surround the delivery of the core product or service.
The next aspect is PERFORMANCE. It is the items that the organisation is performing and whether they are delivering on this promise. Performance is around those things / processes that the organisation can control. For instance an agricultural company is significantly affected by the weather but it can not influence or control this.
The last word in the trio is INDICATOR. Indicator means it is providing information on future performance. Because it is easy to measure history ie balance sheet we spend too much time and effort on these. We need to spend the time on developing indicators that give us information that we can make decisions about the future on.
Lastly another significant problem of counting everything eg the 137 KPI’s is that nobody focuses on them. The person I relate was only concentrating on 7 but her manager may be focusing on a different set. A lot of time and effort was being spent to collect this information but it was wasted. A key purpose of implementing KPI’s is to provide focus for the organisation to achieve its KPI’s. With some people focusing on some KPI’s and others concentrating on a different set you automatically set up a situation for tension.
Focus on what the customer defines success and implement KEY PERFORMANCE INDICATORS around this.
Rules of Thumb – Are they good or bad?
Often in business there are industry rules of thumbs for profits, costs and valuation. There are many examples of these however to illustrate professional service firms often use the one third rule which is 33% wages, 33% operating expenses and 33% profit. Commercial cleaning business try to only have wages as 55% of income. There are plenty of examples but are these useful.
My belief is that these rules of thumbs can be useful if they are used as a guide only. If we rely on them to make significant decisions they we can be led astray. The rules of thumbs can trap you into certain assumptions about the industry. These assumptions may become self limiting. To take the business to the next level it is important to think about business lessons from outside the industry that could significantly accelerate the business.
Before Fedex came into the delivery business it was considered normal to have a delivery rate of 95%. Fedex changed this. They were not happy with the industry norm. Now the delivery rate of Fedex and also the other companies is 99.95%. This does not sound a lot until you realise the number of parcels that are freighted each year. This difference has meant that millions more parcels are getting to where it is meant to.
In Australia financial planning firms have an industry rule of valuation of about 3 times recurring revenue. Financial planning firms are still being sold for these figures. This is despite the fact that there is significant regulatory changes coming to the industry which may significantly affect the recurring revenue. Also this is despite that this method of valuation gives no regard to what the business is actually earning. So the rule of thumb could be a starting guide but then we need to consider the hard facts.
The next area of rules of thumbs is those that a business creates over time for internally use. I have seen businesses where they have determined rules of thumbs for when they are pricing a quote. Again these rules are useful but we need to be constantly reviewing these rules against the hard facts. So for example when the quote is accepted we need then to examine the resulting job profitability and determine whether that pricing rules are still relevant.
So I see rules of thumbs like fire. In its place fire can be extremely useful but if it gets out of control it can destroy all. Use rules of thumbs as a guide but always check the hard facts on a regular basis.
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