The mixed blessings of corporate metrics

Preface: The purpose of this article is to spotlight how unyielding policies can inadvertently stifle a company’s ability to reduce costs or increase profits. In a time when so many companies are facing hardships, they should consider every possible option to achieve savings, increased profits or both. All companies should routinely revue their policies with an aim to replace anything that is outdated or inefficient and it all starts with empowering and enabling your people to think creatively.

If you have ever worked for a large corporation, at some point you will have run into or perhaps even collided with the term, metrics. For those of you who have not, metrics are a standard of measurement used by corporations to determine policy, or rules of engagement.

Metrics, used correctly, are very useful in providing the “framework” for policies, but they must be subject to good judgment and afford sufficient flexibility in order to allow for the making of good decisions. As Captain Barbossa explained so eloquently in Pirates of the Caribbean, “They’re more what you’d call guidelines, than actual rules.” Well, at least they should be.

Here are two examples of inflexible, metrically determined policies that often serve only to suffocate entrepreneurialism and the ability to make sound business decisions. They will clearly demonstrate why profitability and cost savings should never take a back seat to an unbendable rule.

The inflexible revenue metric

I worked for a large international company that had a metric (policy) stating that all reps hired must be able to produce 10 million dollars in sales. These sales had a profitability of about 15%, or one and a half million dollars. I had three reps reporting to me all carrying a 10 million dollar quota. One day, an opportunity arose to hire someone who was very well established in a niche market that could drive profits of 40% but would only be able to achieve 5 million in sales. Here is a simple analysis.

The metric demanded:

• Revenue Quota – 10 million dollars
• Percentage Profit – 15%
• Gross Profit – 1.5 million dollars

The opportunity suggested:

• Revenue Quota – 5 million dollars
• Percentage Profit – 40%
• Gross Profit – 2 million dollars

It seemed clear to me that the second scenario was better than the first. I was told no, you can’t hire that person unless they produce 10 million in sales. How does this make any sense at all? The answer is simple. The metric was based on revenue and did not factor profit. The reasons for this type of thinking are discussed in The Re-Birth of Excellence.

To shed more light on the flaw in this policy, here is a more detailed analysis that factors in Average Selling Price and Unit Sales required to achieve the quota.

The metric demanded:

• Revenue Quota – 10 million dollars
• Percentage Profit – 15%
• Gross Profit – 1.5 million dollars
• Average selling price per unit – $1,600.00
• Number of unit sales required to reach quota – 6250

The opportunity suggested:

• Revenue Quota – 5 million dollars
• Percentage Profit – 40%
• Gross Profit – 2 million dollars
• Average selling price per unit – $25,000.00
• Number of unit sales required to reach quota – 200

As you can see, the unit sales are a fraction of what the metric demanded. This means that transactional costs are now a fraction as well. Shipping costs are much less. The salary (not shown) is the same in both scenarios. No matter how you crunch these numbers, the suggested opportunity will produce a higher gross profit and a higher net profit.

Please understand, I am not against high revenue business models. Many successful companies operate using revenue based metrics. My concerns have more to do with the inflexibility of any policy that does not encourage or bend to allow for profitability.

The inflexible ‘size of facilities’ policy

The same company I mentioned above had another very interesting policy to do with the size of facilities for satellite offices. We were situated in a building that had become too large for the current staff. The lease was coming up for renewal so we were looking for a new location.

The ‘size of facilities’ policy stated that office space must be limited to a maximum of 100 square feet per employee. At this point, the policy was at least 10 years old.

This policy was crafted in major cities where the company had huge buildings supporting many staff. In the 70’s and 80’s, many companies reduced the size of their facilities. Some companies had helicopter pads on the roofs. Some even had their own golf courses. Most executives had large and lavish offices. Difficult financial times (eroding profits) hit the market and so companies “right-sized” their facilities in order to reduce overhead costs. The original intention was to put a limit on the size of an employees work area. It was not meant to limit the size of warehouses, service areas or logistics facilities.

The company flew in some facilities administrators from head office. They found a space for us to lease that fit within ‘size of facilities’ policy. This space had poor parking and did not have adequate space to facilitate all the parts needed to service the local clients. The facility was available for a locked in 2-year lease.

I also found a facility that was about twice the size, had ample parking and more than enough room to warehouse the parts and products required for service. It was in a better location so it was easier for employees and clients to get to. It was also a much nicer looking facility. Lastly, it was half the price and came with a 5-year lease with an option to leave at any time with 3 months notice. It was turned down because … it didn’t fit the ‘size of facilities’ policy.

We have just seen two examples of how inflexible policies can leave money and cost savings on the table. These types of situations are not unique. It is common in many small to large sized organizations.

The following suggestions can help to ensure the making of better decisions. They are based on encouraging creative thought and empowering your people to bring those thoughts forward.

Factor profitability into the compensation plans for your sales force

In all my years, the only compensation plans I ever saw that factored in profitability were the ones I penned myself. With only two exceptions, none of the companies I have worked for discussed the cost of doing business or spent any time encouraging staff to take ownership and think like “good business people”. If you encourage your people to consider the bottom line and empower them to do so, you will create an entrepreneurial and cooperative culture that takes ownership in the success of your company. This is a very good thing! Future articles will discuss this point in detail.

Recognize and compensate ‘all’ of your staff for profitable ideas

Bonus your staff when they find ways to increase profitability and/or save costs. Consider this. If a sales person achieves 120% of quota, you will pay them their salary, commissions and a nice bonus for the extra 20%. These sales are a one time additional benefit for you. The sales person may not over-achieve next year, especially if you raise the quotas too much!

On the other hand, cost savings initiatives and ideas on increasing profitability will have a positive impact for years to come. It is a critical mistake not to recognize these ideas. You should demonstrate that recognition in pay raises and/or bonuses.

Regularly revue and update any policies that are inhibitors to growth

This process must include input from all levels of management. An easy way to do this is to send out a note to your staff that simply asks; “In your day to day activities, do you run into any policies that stop you from making profit and/or cost savings based decisions?” This exercise will have zero impact without your attention. You must review this data as it holds the keys to your ongoing viability. Once you indentify ideas that make sense, you must take immediate action.

In order to do any of these things, you and your management team will need to make yourselves available. You will need to provide your people with a way to communicate creative ideas to all levels of management. You need to encourage entrepreneurialism and promote the idea that you want all of your staff to be part of a successful and profitable business.

Remember, when it’s all said and done, people make the difference, not metrics!

© Gil Namur, 2009