Which companies will fail to reinvent themselves? Their KPI Dilemma

Preparing For The Future Is Easier Said Than Done

A blog by Merijn Rijsdijk about Agile vs. Agility inspired me to write today’s blog. There often is a gap between what companies actually do and what companies think they do (having realized that they need to do it). When considering Agile vs. Agility, companies deploy agile methodologies (this is what they do), and consider (think) that they have achieved agility (which is seen as a key to success); but deploying agile methodologies does not imply you’ve become an agile organization. As an initial follow-up to this blog, I wrote a LinkedIn and Twitter post on people that say they are implementing new business models (what they think they do) while in fact, they are implementing new operational processes, procedures or IT systems. Implementing new business models is broadly recognized as a means to prepare your company for the future (i.e. long term success), but it’s easier said than done.

Business Development: Long-Term Focus

“Business Development” (BD) is one of the most problematic terms in business jargon. If you put ten random people in a room, they may end up having at least 11 different interpretations of this term. In his article What, Exactly, Is Business Development?, Scott Pollack defines Business Development as “the creation of long-term value for an organization from customers, markets, and relationships”. While I do not intend to discuss in-depth how business development differs from sales (that’s a topic for a separate blog article), I’d like to elaborate on the “long term” part of Scott Pollack’s definition of BD.

Most Companies Are Focused On Short Term Metrics

I haven’t met yet a manager in a commercial role (at least anyone from tactical management level to CEO level) who said (admitted) that they don’t invest in the long term commercial success of their business. Everybody does. Or at least, everybody says they do. But do they really?

Organizations Focus On Sales

Most companies are managed by few metrics: sales (the amount of money for which you sell products and services), revenue (the amount of money you collect from your clients) and EBITDA (profit). Shareholders often care primarily about the EBITDA (it’s their profit), yet most business updates and commercial meetings that I’ve ever attended focused primarily on one single KPI (Key Performance Indicator): sales. Why? Because that’s the one KPI that commercial team can influence, if they push harder (at least, in theory). And also because sales is the engine for sustainable growth (you can also reduce costs to increase EBITDA, but that’s often not a sustainable strategy).

Sales Has A Short-Term Focus

If you have or had commercial roles in your career, be honest: How many times have you made decisions that optimized short-term sales while making different decisions could have been preferable in the long term? For example, giving a client a discount if they sign a contract on the last day of the quarter (so that the sales amount counts for this quarter’s target), instead of having them pay a higher amount a week later? Not for nothing do salespeople sometimes have a bad reputation. That’s a pity because I’ve also worked with salespeople who would go a long way for long-term success. But the “system” is designed to promote short term success because sales teams are driven and measured by short term KPIs. Most specifically, they are measured and incentivized by a single KPI: the amount of sales in the current fiscal year.

Is The Short-Term Focus A Problem?

Is the focus on short-term sales targets wrong? No. Companies cannot invest in tomorrow (or: in the day after tomorrow), if they are not successful today. Today’s success provides a means to invest in the future. Sales is and will always remain the engine for success in the current fiscal year, and also in the next one. Sales teams will only remain successful (every year, again and again) in the long run, if sales is complemented by a separate stream within the business, namely a stream that focuses on the long term. And that’s Business Development. Now read again Scott Pollack’s definition of Business Development. And thus: yes, the short-term focus on sales becomes a problem, if the organization does not invest enough in its long term success while being successful in the short term.

Long Term Success: Who Says Elephants Can’t Dance?

I haven’t yet met a manager in a commercial role (at least anyone from tactical management level to CEO level) who said (admitted) that they don’t invest in the long term commercial success of their business. Everybody does. Or at least, everybody says they do. But do they really? Investments in your talent, in your IT infrastructure and in standardizing and optimizing your internal processes are very important for ensuring that tomorrow you can still do what you do today, maybe even better than today. But they do not prepare you for the day after tomorrow. In a world where change is inevitable, continuous and rapid, organizations need to continuously adapt what they do and how they do it, in order to remain competitive, or even relevant in the marketplace. A well-known example is IBM’s transformation from a business-line based IT provider focusing on hardware to a service provider offering integrated solutions, under the management of the company’s legendary CEO Lou Gerstner (recommended reading: Who Says Elephants Can’t Dance). Gerstner Challenged IBM’s DNA and transformed its sales approach, its offerings, its culture and much more. Many think that IBM would not have survived the crisis of falling mainframe prices, had it not gone through this transformation from a hardware company to a services company.

Not All Transformations Require Elephants To Dance

Luckily, most organizations do not face transformation on a massive scale as IBM did. Also, remember that transformation is not the end; it’s a means. The goal is to be a successful organization in “the day after tomorrow”. The goal is to successfully offer valuable products and services to clients on a continuous basis, facing changing business environment (including technology, client needs, client population/segmentation, competition, regulation and other environmental factors). For many organizations, at many stages in their being, investing in “the day after tomorrow” entails developing “only” adjacent capabilities and/or markets to the current ones, or offering the same basic product/service, yet in a very different way (consider for example the transition of banks from paper-based organizations to Internet banking). Not all organizations face an existential crisis like IBM did when Lou Gerstner was appointed as CEO.

Investing In The Long Term

Now let’s get back to my earlier statement, saying that everybody says they invest in the long term commercial success of their business but raising the doubt whether they actually do. Why did I raise this doubt? The answer is: because of what I consider to be “the ultimate test”. What is “the ultimate test”?

Organizations undertake many good and important initiatives for ensuring their long term success. I already mentioned examples such as investment in the company’s IT infrastructure or in key talent. To close the loop, let’s get back to business development, which we defined as a long-term activity. Many organizations have dedicated personnel for business development, an/or teams dedicated to exploring new technologies, and/or product development teams that continuously obtain client feedback for improving their products. Setting up such teams and actively pursuing these tasks are not trivial matters, because – like any business activity – these initiatives require investments (in people, i.e. FTEs; technology, marketing etc) – while they do not generate income in the short term. Therefore, as important as these activities are, they are not trivial for a business that is measured by short term KPIs: this year’s sales, this year’s revenue and this year’s EBITDA.

The Ultimate Test: KPIs

How to distinguish between organizations that REALLY invest in long term success, and organizations that merely think they do? This is not a “yes or no” question; there are many shades of grey. The first step is to realize that you need to transform because the business environment is continuously changing. Next, you can take action. Many organizations make substantial efforts to secure long term success, yet they do not know or understand what it takes to transform themselves. While one could write a long list of criteria (best practices), in my view there is one single ultimate test to verify whether an organization is doing the right things, and doing them right: how the organization measures success. A very common pitfall is that even teams and individuals that are (on paper) focused on long-term success end up being measured based on short-term KPIs.

Short Term KPIs

I argued that most organizations are measured by short term KPIs, and that the main KPI is the current year’s sales target. I remember a conversation with a young, successful sales manager. He reflected on a long-term initiative to develop service offerings that differ from the current ones. He said “I don’t look at opportunities in a horizon further than six months”. Such behaviour nurtures short-term success, and results from the sales incentive scheme: salespeople earn commissions based on short term success only (this year’s sales). Those that have a longer horizon may invest in opportunities for next year (they already think about next year’s commission), but not beyond that. And while this may work for sales teams, it does not work for the organization’s “the day after tomorrow”.

Long Term Focus: The KPI Dilemma

Organizations that have traditionally been managed by short term KPIs often find it hard to measure the performance of teams that are tasked with the long term (just like any organization trying to do something it has no experience in). My ultimate test when I ask myself whether an organization really invests in its long term success is: what are the KPIs based on which you measure the success of people whose role is to focus on the long term success. Please be very honest with yourself as you answer the following question: do you have staff whose focus is “the day after tomorrow”, and (here comes the tricky part) do you measure these people based on short-term KPIs? If you answered the first question negatively, you’re not doing the right things. If you answered the second question positively, you’re not doing things right. In my humble opinion.

KPIs and Cultural Change

Often, the staff of organizations that “have become used” to a certain successful modus operandi is so experienced in (and focused on) doing what they do in a certain way (which has proven very successful along the years), that they have no awareness for the need to think and act differently. Maybe the staff also does not have the will to think differently, because they are measured and incentivized by processes and metrics that have been optimized for the current modus operandi. In such cases, the transformation will require cultural change. If you’ve been measuring your whole organization based on short-term KPIs only for many years, there’s a good chance that your organizational culture is not ready for transformation, because for many years you have implicitly (some would call it “explicitly”) taught your staff that only short term success matters.

Closing Comment: Dedicated Teams

In this blog, I wrote about “business development” and about teams that focus on the long term. I did so for simplicity, yet it’s important to understand that having few people dedicated to the long term is just a lip-service, if the rest of the organization does not realize that long term business success entails (1) a continuous process of developing the organization and its offerings, and (2) when environmental change requires so, even reinventing and drastically transforming the organization. Once the whole organization is behind this goal, you can have short term success (because the sales team successfully sell today’s offerings) while working on the long term success.

To Be Or Not To Become: The KPI Dilemma