Category Archives: Financial Analysis and KPI’s

Eight Common Myths about Business Risk

It seems everyone has an opinion about cholesterol. Most people know there are two types, good and bad. If you ask a friend, he or she will tell you to eat more of the good kind, and less of the bad. Makes sense to me.

Now, I’ve learned that’s bunk. There’s a bad version of good cholesterol that causes disease. And I learned there’s a good version of bad cholesterol. Confused? Me too. From now on, I’m just going to refer to cholesterol by its chemical designation, C27 H46 O. That seems so much simpler.

The word risk suffers from the same confusion. Like cholesterol, risk is a thing. Neither good nor bad. What gives risk its mojo is context. As The Economist reported “Though changing appetites for risk are central to booms and busts, economists have found it hard to explain their determinants . . . the willingness to run risks varies enormously among individuals and over time.”

What is risk? Webster defines it as “possibility of loss or injury.” In most business contexts, risk has broader meaning, which I describe as uncertainty toward achieving a goal. Risks live in the gap between predictions and the actual result. The outcomes can be positive or negative.

Marketers and business developers have long used risk as a competitive weapon. “Buying from our company right now will protect you from falling hopelessly behind your competition.” Such a great pitch! We’ve all used a flavor of it. But risk has always been a two-edged sword. Myths about risk skew assumptions and drive expectations into weird places.

Myth #1: “Customers decide based on facts!” Facts are only part of the decision-making apparatus. “Any decision relating to risk involves two distinct and yet inseparable elements: the objective facts and a subjective view about the desirability of what is to be gained, or lost, by the decision,” wrote Peter Bernstein in his book, Against the Gods.

Myth #2: “Most customers perceive risks the same way.” If every person had the same risk appetite or capacity, our financial markets could not function.

Myth #3: “Anything a vendor can do to mitigate risk will be rewarded with more and faster sales.” If only it were that straightforward. Using that logic, wouldn’t it be compelling for many executives to simply stick with the status quo? While most buyers don’t want to absorb unnecessary risk, every solution creates new risks. So promoting the singular message of risk reduction might ring hollow. The key is to help buyers identify opportunities for eliminating unneeded risks, and to help them identify intelligent risks that are likely to return value to the company.

Myth #4: “Products with short time-to-value are less risky than those with longer time-to-value.” Contrary to some sales assertions, there is rarely certainty about value achievement. If you latched onto this logic, buying a lottery ticket for next week’s drawing would be less risky than buying a US savings bond.

Myth #5: “Showing a prospect the cost of inaction will lead to a sale.” But that’s only one side of the coin. Once funds are committed and a project has been initiated, companies often can’t turn back. That can put them in a riskier position than companies that have retained their financial and technological options.

Myth #6: “Our strategy is fine. We just need to execute!” Strategic risk can have devastating consequences for shareholder value. Boo.com, Pets.com, The Learning Company. During the Tech Bubble, these companies and many others suffered significant losses in market capitalization because they had strategies that proved disastrous.

Myth #7: “My company doesn’t have ethical risks.” I often hear, “that sort of problem can’t happen here.” But it can. Almost everyone knows of a former co-worker (or more) who pushed the ethical envelope when selling to customers.

Myth #8: “Most risk can be managed with careful measurement.” Measurements help, but not every major risk can be easily measured or predicted.

Just like cholesterol, what’s bad risk in one context might be good in another. So it’s best to recognize that the labels people slap on aren’t necessarily accurate in every situation. Debunking myths about risk, and moving beyond its pejorative meaning will help people think about risk in new ways. Not as something that always has to be faced down and avoided, but as something that, when embraced intelligently, opens new opportunities.

A Sales Team Needs More Than “High ROI” and “Low TCO” to Compete

“How will your IT solution help me sell more pizza?”

That was the opening question one COO shot off to a sales team visiting his office to solicit his company’s business.

The team had prepared for a far different discussion. As the COO explained it, following his question, the group looked like tongue-tied deer in the headlights. No one – not the account manager, the pre-sales engineer, the technical director, or the VP of marketing – offered a compelling answer or story. The PowerPoint they brought along was never used, even though it included a nifty slide about their corporate history, lots of technical information, and statistical charts showing ROI (Return on Investment) and TCO (Total Cost of Ownership). The meeting ended awkwardly, but was rescheduled for a later date. Let’s just say that the car ride back to the airport wasn’t upbeat.

The final outcome? It’s described toward end of this blog. But this debacle illustrates why one of my clients, a large software developer, initiated a worldwide program to empower their resellers to shift from selling mainly “point projects” – small, one-time engagements that often involve a single department and typically have small budgets – to selling broad enterprise-level projects that span different divisions, departments, and operating entities.

Selling might be selling, but that’s a paradigm shift. It doesn’t happen by adding a few steps to the sales process, creating more content, or expanding the social media footprint.

Enterprise-level IT sales require sales teams to promote the strategic value of their offerings as much as projecting decent financial returns. As more and more enterprises adopt governance policies and balanced scorecards to ensure alignment between investments and strategy, the need to adopt sales approaches that go beyond “show them the numbers!” has never been stronger. I’ve had the opportunity to drive this metamorphosis more than once. It can be done.

But what’s wrong with talking to prospects about ROI and TCO?

Nothing, other than the fact that many marketers and salespeople simply fail to put these metrics in any context. Here’s a glaring example: One organization sent me an e-newsletter with the subject, Find The ROI In Your Asset Tracking Initiatives. But the accompanying article didn’t draw any connections between ROI and strategy. The chink in the armor is clear: For me, ROI is attractive candy, until I find a higher, more certain number. Then that offering becomes the date that I want to take to the ball. I’m fickle that way, but no different from any other buyer. Find The ROI . . . isn’t really visceral to decision makers who live and breathe strategy [read: C-Level executives].

Why does ROI/TCO messaging alone fail to excite people in a lasting way? Because the heavy lifting in sales involves exposing facts that prospects can believe, then learning whether they care about the issues, then encouraging them to act in order to solve them. Believe-Care-Act – BCA, if you’re into acronyms. ROI and TCO are reasonably helpful for the believe stage, but marginally effective for persuading people to care. Without caring, who would be so bold to expect a person to act? “They just seem unmotivated to improve their status quo.” It’s a familiar refrain we voice when not enough caring occurs on the other side of the fence.

So, beyond ROI and TCO, how can a company gain a sales advantage?

To answer that question, let’s look at how the sales team managed its setback with the pizza company COO. After returning to their office, the group took the time to formulate a set of questions about the growth strategy for the pizza company, including questions about finance, supply-chain logistics, CRM, and human resources. They gutted their original presentation, and met with the COO about two weeks later. Their project was approved and they won the opportunity.

What did the team figure out?

First, the team realized that revenue growth was paramount for their prospect, and that by positioning their offering as the choice that best enabled that outcome, their recommendations were more persuasive. By making the shift from a purely financial appeal to a strategic appeal, the sales team minimized the risk that their prospect would find stasis attractive.

Another important outcome occurred. Because strategic growth impacts every operating unit in an organization, the sales team opened relationships with a cross-functional team of senior executives. Prior to changing their approach, the vendor’s sales team networked only in the IT department. And finally, the icing on the cake: the sales team was rewarded with another advantage they hadn’t planned for or even anticipated – they faced fewer competitors. Why? Because everyone from IT solutions providers to bakery equipment manufacturers were playing the same-old, same old: “High ROI! Low TCO!” But only a handful of suitors were prepared to discuss why their unique pathway to the strategic holy grail was the best way to get there.

How did the sales team realign to address the COO’s problem, and what steps did they follow from beginning to end?

The sales team didn’t have to get spendy to upgrade their sales approach. They didn’t change their product at all. They didn’t invest in more certified engineers or support staff. They leveraged the competencies they already had. Through empathetic listening skills, systems analysis techniques, and business acumen, the sales team pulled out a win from a certain loss. No matter what you sell, knowing how your product will help your prospect sell more of what he or she sells will always be valuable.

Further reading: Strategic Questions Will Uncover Strategic Opportunities.

Can Sales Productivity, Ethics, and Shareholder Value Coexist?

“As practiced today, capitalism too often becomes a race to the bottom. In low-growth economies, a focus on earnings-per-share (EPS) is leading to more unemployment and deepening inequality,” Mark Benioff of Salesforce.com wrote in The Huffington Post last week.

That’s a far different message from what I learned as an undergraduate, where I was indoctrinated with the ideal that what was good for investors was good for customers, employees, and the world. Ahhhh. Simplicity!

But as an account executive at a publicly-held company, the investor credo, revenue-uber-alle, translated into a slightly different message for the sales force:

“I don’t care how you make your sales number, as long as you make it!”

That was my sales manager’s guidance on how to achieve quota. Plenty of wander-room on that pathway.

My manager made assumptions that the sales team had the knowledge, motivation, and integrity to deliver the required results. He didn’t have the time or interest to micromanage anyone. At my company at the time, many salespeople got fat, dumb, and happy under such laissez-faire management. Ultimately, sales suffered in the face of unrelenting competitive pressure, shareholder demands, and product commoditization.

Policies changed. Not only did management measure results, they began to scrutinize sales activities as well. Thousands of other sales organizations facing the same forces created measurement spotlights under which few could hide.

Today, business needs and technology have converged, causing the productivity-management pendulum to swing even further toward Total Management Control. Are purveyors and users of sales productivity software tools telling us that salespeople are too stupid to figure out how to be productive? Are their managers too lame to manage? Pete Reilly, a senior vice president at RedPrairie, developer of the Ann Taylor retail labor productivity system ATLAS (see my blog, Please Buy From Me! The New Ann Taylor Shopping Experience) said “the [ATLAS] system will allow you to push [productivity initiatives] too far, but at the end of the day, it is based on business principals and how I treat my employees. That is really up to the retailer.” His statement reveals his ambivalence. But it’s clear that financial success depends on how businesses deploy productivity tools, and no one should assume that they understand what they are doing.

The most insidious dangers aren’t created by productivity rules based on flawed assumptions or incorrect information. They’re created when managers detach from the gut-wrenching ethical and personal conflicts imposed on the employees who are measured and managed. Scott Knaul, former director of store operations for Ann Taylor, revealed his own reasoning when he was quoted in the Wall Street Journal (Retailers Reprogram Workers in Efficiency Push, September 10, 2008) saying, “giving the [productivity] system a nickname, Atlas, was important because it gave a personality to the system so [employees] would hate the system and not us.” Yes, that creeped me out, too.

What Mr. Knaul might be alluding to are torn emotions caused by Ann Taylor’s institutionalized sales conflicts of interest—all in the name of productivity. To mention a few possibilities: “If I’m honest with my customer, I could lose this order, and possibly my job.” “How do I spend time with my ailing parent and satisfy the minimum number of hours I must work to keep my time slot?” “As a single parent, how do I plan my weekly food purchases knowing my work schedule can be cut or changed at a moment’s notice?” These poignant struggles are frequently the other side of productivity-improvement equations, unmentioned when numbers are bandied about at the quarterly management retreat.

If laissez-faire management contributes to complacency, and overbearing rules are tantamount to wielding a stick without offering any carrot, what works? For insight, I consulted a sales leader, Mark LaFleur, former VP of Worldwide Sales software developer GroupLogic. He tole me, “Understanding what causes sales to happen and managing metrics is critical to success, but sometimes it’s easy to get so caught up in metrics that you lose sight of the big picture . . . Effectively managing your team’s performance requires a balance between hard metrics and business instinct. I have found that there is no substitute for frequent, intensive one-on-one meetings with reps and sales managers, where you hold them accountable for understanding and articulating all aspects of their business and how they are tracking toward their revenue goals. Metrics are only one component of that discussion, and the key there is to develop practical metrics that really do lead to sales, communicate them clearly, and then hire disciplined sales people that are smart enough to understand their importance.”

It’s hard to find a starker contrast to the metrics-driven mindset at Ann Taylor. Still, it’s troubling to think about the future clash between productivity improvement, business value, and work-life balance. Effective managers recognize both the power and limitations of productivity measures, and that we have the opportunity today to build shareholder value without exploiting the people who help deliver the value we produce for our customers.

Race and Gender Influence Customer Service Bonuses

Originally published 06/01/09

Are customer satisfaction surveys a fair and unbiased tool for for assigning employee bonuses?

No, according to a study published in the Academy of Management Journal, An Examination of Whether and How Racial and Gender Biases Influence Customer Satisfaction. According to lead author David Hekman, assistant professor of management at the University of Wisconsin, surveys “are highly reliable—but they are reliably wrong.” The authors believe that customer satisfaction surveys are biased because they are “anonymous judgements by untrained raters that usually lack an evaluation standard.”

Hekman conducted several experiments to measure customer satisfaction. In one experiment, subjects watched videotaped interactions between a bookshop sales clerk and customers, and were asked to imagine they were the customer and to rate the bookshop’s service performance. Three actors played the part of the sales clerk—a white male, a black male, and a white female. All used identical settings and scripts.

The subjects shown the white male clerk rated the bookshop’s service 19% higher than subjects who viewed the other two actors.

If we use customer satisfaction measures to assign bonuses, can we assume we’re not compounding race and gender bias? If this assumption isn’t correct, how can we make survey-influenced compensation systems fair? Could other attributes not measured in Hekman’s study—for example, weight, age, and appearance—create similar results?

ROI Hype: Finance for Fools?

Originally published 1/7/10

ROI. Finance for fools? “Guidance” for the gullible? It’s hard to say, but it’s chic to pay homage to its numerology. Today I read an article that stated “In Social Media the Return on Investment (ROI) is based largely on the influence you have upon your group of friends.” Clear as mud.

Have salespeople and marketers corrupted a useful financial equation—and made it so generic that it lacks meaning? To find out, I dusted off my lightly-used college textbook, Techniques of Financial Analysis, by Erich Helfert. Here’s his definition, followed by an example:

“ROI = Average annual operating cash flow divided by net investment. = $25,000 divided by $100,000 = 25%.”

Then he wrote, “With no reference to economic life . . . all the measure indicates is that $25,000 happens to be 25 percent of $100,000. Note that the same answer would be obtained if the economic life were 1 year, 10 years, or 100 years. In fact, the return shown would be true in an economic sense only if the investment provided $25,000 per year in perpetuity; only then could we speak of a true return of 25 percent.” (If you sell a B2B solution and are willing to commit to that interpretation, please share your contact information below.)

Ignoring this not-so-trivial caveat, thousands of blogs, Tweets, conversations and sales proposals unabashedly pontificate ROI, a metric that ignores time and risk—two key business decision-making variables. How helpful is that? For insight, I contacted a person who understands the in’s and out’s of investment strategy, accounting professor Robert Kemp at the University of Virginia’s McIntire School of Commerce.

He prefaced his comments by sharing that the overarching objective of an organization is to create value, and that organizations favor transactions in which value received is greater than value given up. That makes sense. And ROI enables decision-makers to uncover the answer?

Not exactly, he explained. “There are three questions about value that decision makers must answer: What do I get, when do I get it, and how certain are the answers to the first two questions?” He said that ROI can answer the first question, but not the second or third. Further complicating the sometimes-assumed precision of ROI is that financial executives don’t regard the variables of cash flow benefits and investments consistently, because both are “subject to SWAG‘s in accrual accounting,” according to Kemp. ROI’s usefulness clearly has limits. Just ask anyone who invested with Bernie Madoff.

More robust calculations such as Net Present Value (NPV), which offsets the present value of cash outflows against the present value of cash inflows, consider time and risk. According to Robert Higgins, author of Analysis for Financial Management, “a crowning achievement of finance has been to transform value creation from a catchy management slogan into a practical decision-making tool that not only indicates which activities create value but also estimates the amount of value created.” With that nifty endorsement, you’d expect business developers around to world to flavor conversations with NPV instead of ROI, but it hasn’t happened.

Whether a business decision involves IT, Marketing, or Operations, Kemp believes that a key question to answer is “what is the value to the total organization if I approve a given initiative, versus what is the value if I do nothing? That requires comparing marginal benefit to marginal cost.” He cautions that decision makers face a dangerous trap by exploring that question without looking into the future.

He illustrated the conundrum using Netflix and once-archrival Blockbuster, which used vastly different value-producing strategies. Thriving Netflix adopted a long-term view of the business value of web-enablement, and invested accordingly. Failed Blockbuster, bloated on their doomed late-fee cash cow, focused on maximizing current period earnings. Happily, Netflix executives didn’t limit their investment analysis to performing a simple ROI calculation. If they did, they’d be sitting at the bar with ex-Blockbuster executives, talking about the good old days when decision makers could be fat, dumb and happy.

ROI hype creates numerical misalignment—with marketers and salespeople on one side, and CFO’s and financial decision makers on the other. Ironically, when salespeople tout time- and risk-agnostic ROI, they reinforce the same dysfunctional short-term, Blockbuster-like thinking they’re often trying to overcome.

But if ROI’s calculus has flaws, why do vendors persist in using it when “proving the business case?” It’s how we’ve been brought up. As marketers and salespeople, we aren’t rewarded for casting doubt on what we sell. We’re certain. We’re confident. We succeed because we create concrete visions. In sales meetings, acknowledging risk and waffling about Time to Value grate like discordant musical notes. Little wonder that we resist embedding those variables in the calculations we offer to decision makers.

Kemp put it this way, “change creates enormous amounts of risk.” But by hyping ROI, we conveniently sidestep that fact. We pretend it just doesn’t exist. But our customers and prospects aren’t stupid. They’ll figure out what increases value—and what threatens it.

In sales, when we lose an opportunity, we sometimes say “the customer didn’t buy the math.” Maybe they don’t buy the equation, either.