While companies should not reward every margin activity, performance measurement systems that result in long lead times and low ROI valuations risk stagnation. The following example illustrates these principles.
Jim, while working for Company A, comes up with new idea for generating new business. Instead of mining the existing client base and making traditional sales presentations to prospects, Jim wants to conduct a broad industry survey and share the results with existing and potential clients. By demonstrating the company's industry knowledge and providing value upfront, Jim figures he will be able to increase the number of new client contacts and contracts. However, he will need specialized resources and capital to develop the survey instrument, distribute survey materials, analyze the results, and prepare reports on the findings.
Company A tracks only one performance measure - revenue. While Jim's strategy will increase the number of new clients, initial contracts are likely to be much smaller than those from existing clients. It will take months to execute his strategy and perhaps years until those new client contacts turn into significant accounts with turnovers similar to that of the firm's established customers.
Jim's search for internal resources and partners is hampered by the long lead time between initial investment and anticipated results as defined by Company A's performance management system. He receives less resources than needed and the survey is less useful. Still, he is able to attract several new clients and secures initial contracts with a handful of them. Unfortunately for Jim, those contracts are too small to receive much notice. Internal backers aren't encouraged to repeat much less expand the strategy while Jim's annual bonus reflects his lower performance in revenue generation as a result of all the time spent working on his survey project.
Over time, a few of those new clients do turn into major accounts for Company A. By that time, however, Jim has moved on to another firm and few are left who remember that those customers started with a margin initiative, now proven successful. The initial backers of the initiative who are still around made those investments so many budget cycles ago that connecting that past investment with current results is difficult in the overall context of day-to-day operations.
Jim left Company A for Company B. Company B tracks two performance measures - revenue and new customer acquisition. Recognizing that new clients are vital to the long-term growth of the firm, Company B weights initial contracts with new customers by a factor of 10. A contract of $100,000 from a new client is therefore equal to a contract of $1,000,000 for an established client ($100,000 X 10 = $1,000,000).
Realizing his idea successfully acquired new clients, Jim tries again at Company B. Jim is successful at securing the needed resources because stakeholders realize corporately-recognized results can be realized quickly. Jim conducts his margin project and many new clients are added to the firm's rolls. Jim and the project's backers are quickly rewarded for their efforts because of the new client multiplier. This leads to a promotion for Jim and a new survey. Over time, Company B makes industry surveys a key component of their marketing strategy while many of the initial new clients become mature accounts generating new revenue for the company and driving corporate growth.In the above example, neither company initially used industry surveys as part of their business development efforts. Jim's idea was the same and equally likely to succeed. What changed was the corporate recognition systems at Company A and Company B. Company B's performance measures encouraged margin investments leading to a desired corporate objective - long-term growth through the acquisition of new clients. Company A most likely seeks the same result, but without supporting that objective with appropriate performance measures risky margin initiatives to improve new customer acquisition are unlikely to be implemented.
While some one-measure companies exist, the above example is highly simplified. Neither company had performance measures that directly encouraged margin initiatives to improve profit margins, reduce operating expenses, or improve productivity. In addition, companies need to think about the repercussions of performance measure design. If Company B set the multiplier for new contracts at 20x, 30x, or 50x, employees would be driven to ever greater efforts to acquire new clients but at the cost of servicing existing accounts.
Yet, there are several important lessons displayed in the example.
- Corporations with broad-based performance measures support business innovation by creating multiple pathways to formally-recognized success and rewards.
- Performance measurement systems that reduce margin initiative lead times encourage long-term corporate value creation.
- Innovators and margin leaders will naturally gravitate away from companies with narrow performance measure regimes and toward companies that support lower margin initiative ROI lead times.
