Customer, first – Shareholders, last
Posted on February 19th, 2010 by Paul McArdle – 1 CommentI have previously written about how we need to be focused on delivering value to our customers in order to achieve our vision for the growth of our business.
A relentless drive to deliver real value to our customers is one of my Core Values.
I know that this is not the way every company approaches business, but it is where our bus is headed.
Hence it was with great interest that I had a chance to read through Roger Martin’s article “The Age of Customer Capitalism” in the HBR Magazine for January-February 2010 – as this provided another reason to do the same.
The Main Ideas in the Article
It is a good article that you should grab and read, but here are the main points as they apply to us:
1) Optimise for one Variable
The author notes that it is practically impossible to optimise for more than one variable.
Hence the implication is that companies should think carefully about what their primary driver is – as this dictates everything else.
2) Focusing on Shareholder Value is Sub-Optimal
The author makes the point that from about 1976, professional management of companies were increasingly encouraged to “swear allegiance to maximising shareholder value”
The author notes that the prompt for such an apparent narrowing in focus was an article written in 1976 in the Journal of Financial Economics, which I have located here, for ease of reference:
The author notes that even the “poster-boys” of the SVA measurement discipline (such as GE under Jack Welch and Coca-Cola under Roberto Goizueta) did not deliver sustained returns:
(a) That were higher than the returns delivered by companies who chose, instead, to focus on the customer; and
(b) Especially returns that continued to grow after the departure of these CEOs departed.The primary reason for this, the author cites, is that the primary driver of traded share price is not the current value delivered, but the expected future value (i.e. stockholder’s expectations for how quickly the company will grow).
Hence, focusing an organisation on its share price, in the end, leads the company to do things to drive the shareholders expectations of higher and higher growth (rather than concentrating on current business) – which is not sustainable. In the end, we just get Enron et al…
Given we are not a listed company, you might argue that the drivers for us to act in a similar way would not be great. However, over 10 years we have had our share of shareholders trying to drive the business to maximise profit, as opposed to growing our team and our capability to serve clients. Like many companies in our stage of development, this means that we deliberately make low (or no) profit currently, based on the desire to re-invest for the future and strengthen the service we deliver to clients.
3) So what is the purpose of a business?
The author states agreement with the Peter Drucker comment that:
The primary purpose of a business is to acquire and keep customers
I agree with this principle. In more complex lingo, the author puts it this way:
“Rather, companies should seek to maximise customer satisfaction while ensuring that shareholders earn an acceptable risk-adjusted return on their equity”
More like an MBA would write, but less understandable by all. The author’s point in writing it follows from point 1 above, in which the author notes that:
“Unfortunately, as optimisation theory maintains, there is no way to simultaneously optimise two different things – that is, to maximise two desirable variables or minimise two undesirable variables.” (where the variables are interrelated).
(However) “It is possible to maximise shareholder value given a minimum hurdle rate for customer satisfaction, or to maximise customer satisfaction given a minimum hurdle for shareholder value.”
It is the latter we will be focused on.
4) What does this mean for remuneration?
This was the most valuable piece of the article, for me – given the recruitment we are embarking upon, this is very timely.
You should get the article for the full story – my takeaway is that the vesting period for stock options (or escrow for shares) would need to be very carefully thought through in order to incentivise the right behaviour.
The author makes particular comment about A. G. Lafley’s compensation structure at P&G:
“As for restricted stock, which represented a significant portion of Lafley’s incentive compensation, none of it actually vested before or even at retirement. The vesting period will begin a year after his retirement and will last 10 years.
Had Lafley managed shareholders’ expectations to peak at his retirement, only to fall off thereafter, he would have hurt his own compensation.
Hence, for his entire tenure as CEO, he had the incentive to build the business for the very long term, groom a great successor, and leave P&G in excellent condition.”
Because P&G had a stated culture in which the customer came first, the author notes that it was entirely logical (and workable) that this should be the case.
I will have to think about how this might be applied in our case…
5) Caveat about remuneration
Note, however, my belief that financial incentives should be the primary driver of anyone’s performance for our customers in our business.
I have posted about the greater importance of Intrinsic Motivation before.
6) Where to Employees Rank?
If Customers come before Shareholders, asking where Employees sit in the continuum is a good question.
Some books (such as “People Glue” by Ian Hutchinson) posit that Employees should come first – however such a statement can often lead to a situation whereby the customer focus is lost, as I have noted before.
Hence, to be clear, in my view Customers come first, Employees a close second and Shareholders a delayed third.
This means that, in terms of Daniel Pink’s key words (Autonomy, Mastery and Purpose) having employees “on the bus” who delight in delivering real value to clients achieves two things:
(a) Firstly, it means that clients are much more likely to have their needs met (and more) on a sustained basis.
(b) Secondly, in the process of delivering this value to customers, we will have gone a long way to providing employees the three aspects of Intrinsic Motivation that are so important:
i. Autonomy - by providing employees context (i.e. WHY) instead of content (i.e. HOW), we satisfy their need for autonomy. In other words – do what needs to be done to delight the customer.
ii. Mastery – similarly, the employee is empowered to develop the skills necessary in their domain in order to delight the customer
iii. Purpose – because of a direct focus on the needs of a Customer, this automatically provides a purpose larger than just making a pile of cash. One example is our Mission.
In simple terms = if Customer are happy, then our business is sustainable and Employees can be remunerated, and there will be some value left over for Shareholders.
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Background
I have previously posted about how we’re striving to marry analysis AND innovation within our company, in order that we can achieve ongoing growth of “cash cow” product lines, and (at the same time) introduce new products.
Indeed, accountability for both is part of the role description for our (cryptically named) General Manager for DDD WCW – which we’re in the process of recruiting now.
This previous post was also inspired by another article written by Roger Martin.
Roger’s book “The Design of Business” has arrived (along with a pile of others) and will post a more detailed review of the book, once we have had time to read it.
we used to say ‘look after your customers and employees and the rest will look after itself’. Slightly simplistic, but served the purpose for the majority of cases.