Tag Archives: revenue

Why Companies Must Care about How They Achieve Revenue

Search online for the phrases crush your quota and rapid revenue growth, and you’ll get about 4,400 and 49,000 results, respectively. As a society, we not only adore revenue, we covet its fast and furious capture. As my district manager used to say to me, “I don’t care how you make your number, as long as you make it!” His comment reflected the culture that permeated the organization.

I could have taken his comment as license to embark on devious pathways. If he had any concerns, he didn’t share them. He should have. Dishonesty, heavy-handed persuasion, and customer harm are common problems in sales execution. It’s never wrong to discuss them. If you have worked inside a sales organization even a short time, you can probably relate an incident or two.

At my company at the time, sales reps pursued a single objective: make quota. Almost three decades later you’ll still find make quota as a top priority in most sales organizations. For many sales reps, quota shortfalls mean losing your job.  That creates other problems. When you wake up every day with a knife-sharp pink slip suspended above your neck, ethical scruples can interfere with job security. The ethical dissonance salespeople experience over their careers would stun outsiders. You would think that ethical conundrums would be a major topic at sales meetings. But over many years as a sales rep, I logged countless hours in meetings dedicated to “quota-busting tips and tricks”, but I don’t recall a single conversation where ethics, honesty, integrity, or moral conduct were even discussed.

That doesn’t prevent people from pointing the finger at “aggressive, manipulative sales reps” whenever a news story breaks about a company’s systemic deceit. The blame is often misplaced. Unethical business development practices are often a leadership issue that can be traced to the top of the org chart.

Consider the way companies hype their revenue machismo, while sweeping their ethical dirt under the rug. In its 2016 annual report, 21st Century Fox, parent company of Fox News, wrote,

“The Fox News Channel, under new leadership, is stronger than ever, and is on track to have its highest rated year in its 20-year history. There has been some speculation that Fox News’ unique voice and positioning will change. It will not.”

and,

“Selling, general and administrative expenses decreased 3% for fiscal 2016, as compared to fiscal 2015, primarily due to the sale of the DBS businesses and Shine Group partially offset by higher selling, general and administrative expenses at the Cable Network Programming segment.”

VW’s 2014 annual report reported revenue this way:

“The Volkswagen Group continued its successful course in fiscal year 2014, again generating record sales revenue and operating profit in an ongoing difficult market environment . . . The Volkswagen Group generated sales revenue of €202.5 billion in fiscal year 2014, 2.8% higher than in the previous year. The clearly negative exchange rate effects seen in the first half of the year in particular were offset by higher volumes and improvements in the mix. At 80.6% (80.9%), a large majority of sales revenue was recorded outside of Germany.”

At the very moment these self-congratulatory passages were crafted, 21st Century Fox was paying hush money to victims of Bill O’Reilly’s predations, and VW was violating regulations by rolling carbon-spewing vehicles off their assembly lines. That’s a truckload of eeeeeeewwwwwww fluffing up the financial reports for investors. These companies could write a how-to for converting their operational stench into the sweet-smelling perfume of ka-ching. They’re far from alone.

A more transparent 21st Century Fox would have written,

“Revenue and profits were up this year at Fox News due to lower than expected payouts to silence Bill O’Reilly’s sexual harassment victims. Legal costs decreased as well. As a result, SG&A expenses as a percent of revenue achieved its biggest decrease in five years. We expect that trend to continue, despite the obvious risks from Mr. O’Reilly’s unchecked predilections.”

And VW would have shared, “While our vehicle portfolio has achieved dramatic improvements in average mileage, VW has not reduced fleet CO2 emissions. However, the company has developed technology to circumvent environmental standards enforcement worldwide, resulting in unhindered sales, and significantly higher profits than could be achieved with legally-compliant vehicles.”

Fat chance! The excerpted passages are lies by omission. But we’re reminded of the intoxicating power of the word revenue. By itself, revenue commands gravitas and respect. Pad it with punchy words like “Achieve geometric revenue growth . . .” and readers willingly downplay ethical concerns – if they had them in the first place.

Don’t look for a change anytime soon. FASB guidelines don’t require companies to differentiate ethical revenue from unethical. We anoint it with a catchy catch-all: “The Top Line.” Not everyone realizes that some bucks are toxic, though I’m certain that the CFO’s at 21st Century and VW have since shared that epiphany with their successors.

On April 3, 2017, Forbes published an editorial stating that O’Reilly’s job was “safe” at Fox News. The reason? Money. The writer presented what he believed were forceful facts: “The O’Reilly Factor generated $446 million in advertising revenue for the network from 2014 through 2016, according to Kantar Media. Last year, the show brought in an estimated $110.8 million in ad revenue, according to iSpot.tv. That compares to the 2016 of $20.7 million in advertising for MSNBC’s biggest star, Rachel Maddow, who is on an hour later. Fox News makes up about 10% of its parent company 21st Century Fox’s revenue and about 25% of its operating income.” Given this adulation, it’s little wonder that O’Reilly felt unassailable. I’ve seen the same pattern within other organizations. The indiscretions of “top rainmakers” are tolerated – so long as they’re making rain.

Yesterday, the New York Times reported that Douglas Greenberg, among Morgan Stanley’s top 2% of brokers by revenue produced, continued to work at the company, despite four women in Lake Oswego, Oregon reporting that his violent behavior drove them to seek police protection. “For years, Morgan Stanley executives knew about his alleged conduct, according to seven former Morgan Stanley employees.” (Morgan Stanley Knew of a Star’s Alleged Abuse. He Still Works There, New York Times, March 28, 2018).

“’21st Century Fox certainly has an economic incentive to keep Bill O’Reilly on air,’ said Brett Harriss, an analyst at Gabelli & Company, adding that any backlash the company faces from advertisers would be temporary.” Just 16 days after the Forbes column published, Fox fired O’Reilly. Apparently, in his smug surety that revenue is king, Mr. Harriss forgot that preventing a valuable brand from winding up in the dumpster is an important economic issue, too. Poignantly, we should remind ourselves that no matter what, this debate brings no solace to O’Reilley’s victims.

The US Equal Employment Opportunity Commission (EEOC) reported that since 2010, employers have paid $699 million to employees who have alleged they were harassed in the workplace. The report “cited an estimate of settlements and court judgments in 2012 that racked up more than $356 million in costs. These don’t include indirect costs such as lower productivity or higher turnover,” according to reporter Jena McGregor of The Washington Post. The EEOC report didn’t distinguish how much of those fines costs were attributed to top revenue producers, but I’m willing to wager based on this evidence, it was a sizable chunk.

Here’s what “I don’t care how you make your number as long as you make it” looks like when it reaches the headlines:

  • We don’t care if our employees are grievously harmed. (Wells Fargo)
  • We don’t care if innocent people are sickened using our products. (Peanut Corporation of America)
  • We don’t care if our exploding airbags make people die. (Takata)
  • We don’t care if preserving our profit margins endangers the lives of our customers. (GM)
  • We don’t care if our pharmaceutical price hikes make life-saving medications unaffordable (Turing)
  • We don’t care if our customers are harmed in the boarding process. (United Airlines)
  • We don’t care if we deceive our customers. (Trump University)

What’s the remedy?

  1. Care. “I don’t care how you make your number, as long as you make it” should never be a sales mantra.
  2. Stop rewarding executives, marketing professionals, and sales staff exclusively for revenue achievement. Instead, compensate on value delivered. That’s more difficult, but it’s safer.
  3. Stop obsessing over maximizing shareholder value. One reason that many strategic decisions ultimately cause harm. According to Professor Bobby Parmer of the University of Virginia’s Darden Graduate School of Business, “Shareholders don’t own the corporation. Public companies own themselves. Shareholders own a contract called a share. There is no legal reason to put shareholder interests above anyone else. It’s a choice, but not mandated. There is no legal duty to maximize profit. As long as executives aren’t violating the law, the courts won’t interfere with their decision making . . . Across hundreds of studies, there is no evidence that companies that maximize shareholder value are more profitable.”

Would these changes eliminate all harm that corporations create? That’s unlikely. But we need to stop our fawning rhetoric about revenue. We need to redirect our infatuation, and instead honor and reward outcomes that provide more equitable and sustainable outcomes. We will always have good revenue and bad revenue. It’s important that we stop turning a blind eye to the difference.

 

Revenue Uncertainty Part II: Putting Uncertainty to Work at Your Company

Last year I snapped a photo of a curious bumper sticker, and posted it on Facebook. It read, If you’re prepared for flying irradiated zombies that can swim, then you’re prepared for anything. I figured the car’s owner to be either a risk manager or an insurance agent. Who else would be moved to share this wisdom?

When dealing with uncertainty and risk, we humans follow a pattern. We collect an array of facts about things that matter. We relate these facts to other facts. Then, we assess that mass of information to glean understanding for how future outcomes might unfold. Ultimately, we must untangle this messy conglomeration of fact and feeling to answer a vague question: now what?

“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. Here’s where things get interesting, because at this point, the pattern begins to fray. The actions that we plan are based on our dynamic, individual mix of optimism, confidence, and loss aversion. A constant mental tug-of-war that has shaped our personalities since we were tiny infants. These emotions combine within us as uniquely as water crystals in snowflakes.

Maybe, just maybe, that irradiated zombie visage pushes a bright-red risk button for someone – especially someone who has learned about drone technology, and recognizes its potential sinister uses. But one person’s sincere concern over possible zombie infestation can be another person’s dismissal of an irrational fear. In business development, I still marvel that people unabashedly proselytize rules pertaining to buyer behaviors.

Compared to human fickleness in risk assessments, software algorithms are coldly indifferent. Give a computer clean data along with a set of logical rules for analyzing it, and you’ll get consistent interpretations. Don’t like the results? Refine the algorithm! Alas, for now, we humans are stuck with pesky biases that interfere with the uniformity we often crave.

This yin-yang of risk seeking and risk aversion between and within individuals creates immense organizational challenges because people – not algorithms – still make most of the high-level, strategic decisions in an enterprise. And executives suffer a love-hate relationship with uncertainty by sometimes confronting it, sometimes sweeping it under the rug, and sometimes, doing both. So here’s the problem: how do you bubble up the most relevant, consequential uncertainties, and put them into a collaborative space for people to consider, analyze, and use for strategic planning and decision making?

Not surprisingly, there’s a process for that! Here’s how to put uncertainty to work for your company:

1. Start with a deterministic statement. In most organizations, they’re easy to find. For example, “In the next five years, we will increase our annual revenue by seven times our current level,” or “our target operating margin for next fiscal year will be 20%.”

2. Identify areas of concern that might inhibit achievement of that goal or target. This requires people – preferably, many people – to raise a hand and say, “well, what about, what about, what about, and what about . . ?” Write those what about’s on the white board, and you’ll develop a picture of specific uncertainties that exist in what was an opaque swirl of unknowns. Some thought starters: “Customer demand,” “parts availability,” “meeting hiring targets,” “economic conditions,” “currency valuations,” “pending regulations” “competitive product introductions.”

3. Prioritize those areas of concern by ranking them from most likely to apply pressure on revenue results, to least likely.

4. For each high-priority area of concern, take a view on a related process, and, over a specific planning time frame, forecast the minimum, most likely, and maximum values that could occur. Example 1: “in the next 12 months, revenue from service agreements will not be less than $10 million. The best result we could achieve will be $30 million, but we’ll probably be somewhere around $22 million.” Example 2: “next year, our worst case for customer churn will be 18,000, our best case will be 7,000, but we should anticipate churning about 14,000.”

Note: the most likely value is not necessarily the average between minimum and maximum – and most often, it isn’t. For example, the most likely revenue produced by a new sales rep will skew toward the minimum value, and the opposite is typical for a more experienced rep.

5. For every minimum value, explain why it’s not possible to achieve a result that is lower, and for every maximum value, explain why it’s not possible to achieve a result that’s higher. For example, there might be a ceiling on units sold because factory production might be unable to exceed a specific capacity, and outsourcing manufacturing isn’t feasible. Or, for planning quota achievement by sales rep, the minimum value could be derived if every territory generates run-rate revenue of $X million.

As daunting as uncertainties might be, they serve a vital function to open conversations, and to enable people to develop an understanding of probabilities for business outcomes. By now, you have recognized that for every target or goal, there are identifiable circumstances that are consequential for achieving them. The variables have many possible values, and they can combine in thousands – or millions – of different ways. If unemployment increases by 6%, AND average sales price is $145.00, AND salesperson productivity remains static, AND the development team delays the new software release by six months . . . will the company meet its financial goal? You get the picture. When forecasting an outcome of interest – revenue, net profit, new customer acquisition, average revenue per transaction – the sheer magnitude of number crunching requires software for simulating the results.

Through analytic tools, insight for very complex uncertainty problems can be revealed. Managers can ask which outcomes are most likely given a particular condition, or set of conditions. How might price increases affect demand? Which projects will likely achieve the biggest increases in revenue? Probability modeling makes the answers accessible.

Next month’s column, How to Model Revenue Risk, adds five steps to the five provided in this article, and using an example, I will illustrate how to solve common problems in revenue uncertainty through Monte Carlo simulation.

Put uncertainty to work for your company. What begins as a whirlwind of uncertainty can be used to gain clarity on how to achieve your most important, mission-critical goals. An infestation of flying irradiated zombies won’t be on everyone’s list of worries, but without first having a conversation about what is, we can never know for sure.

To read the first article in this series, please click here: Revenue Uncertainty – Part I: Known Unknowns, Unknown Unknowns, and Everything in Between.

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