One of the business world\u2019s most repeated truisms is that you get what you measure.\u00a0\u00a0So it stands to reason that, if the goal of an organisation is to maximise profit, a unit\u2019s contribution to that profit maximising effort should be the primary measure against which it is evaluated.<\/p>\n
Instead, it is common to find a wide range of diverse measures being used to evaluate and direct teams.\u00a0\u00a0These measures are usually assigned using a traditional top-down budgeting approach.\u00a0\u00a0The CEO might start the budgeting process by aiming to deliver a specific return on equity to shareholders.\u00a0\u00a0Then, together with the other directors, she might identify a number of strategies that they believe will deliver that return.\u00a0\u00a0Those strategies are then broken down into goals to be achieved by each of the business units that make up the organisation.\u00a0\u00a0For example, the marketing team\u2019s goal might be to generate new loan applications.\u00a0\u00a0Similarly, the product team\u2019s goal might be to increase the average revenue-per-account.\u00a0\u00a0These goals are converted into specific measures and success is defined by the team\u2019s ability to meet and exceed those measures.<\/p>\n
This approach seems logical but it has several important weaknesses.\u00a0\u00a0In this case, the marketing team might offer loans to potential customers at a reduced interest rate in order to increase demand.\u00a0\u00a0As logical \u2013 and rewarding \u2013 a move as this might be from their point-of-view, it would also be in direct conflict with the product team\u2019s goal of increasing the average revenue-per-account.\u00a0\u00a0Alternatively, a change in the prevailing market conditions might reverse the need for market share growth.<\/p>\n
Profit Model Analytics offers a solution by improving goal alignment in two ways: it co-ordinates the activities of disparate teams with each other and with their environments.<\/p>\n
Firstly, consider the interaction between teams.\u00a0\u00a0Individual profit levers seldom reinforce one another.\u00a0\u00a0In fact, the improvement of one profit lever is often only possible at the detriment of another.\u00a0\u00a0So, when teams are given goals based on individual profit levers, conflict is the norm.\u00a0\u00a0For as long as the full impact of a strategy is divided across two or more teams some of those teams will remain overly conservative and the others overly aggressive.<\/p>\n
However, the profit model looks beyond a team\u2019s narrow area of interest and considers the impact that a strategy will have on the broader organisation.\u00a0\u00a0It elevates the interaction of profit levers, or the profit model, above the performance of any individual profit lever.\u00a0\u00a0Thus, it forces teams to share goals and co-ordinate their activities across reporting structures.<\/p>\n
In the scenario above, the marketing team would now be incentivised to follow a different and more profitable strategy than simply increasing the number of new applications received.\u00a0\u00a0A profit model would show that the number of applications a bank receives is a cost driver, not a revenue driver.\u00a0\u00a0In fact, revenue is only derived from loans that are turned into good customers and this is a factor of the bank\u2019s approval rate, the rate at which customers\u2019 take-up approved loans, the customers\u2019 attrition rate and the inherent risk of the target market.\u00a0\u00a0In order to maximise profit therefore, the marketing team might decide to concentrate its efforts on appealing to a lower risk population whose members are more likely to be approved for loans or on encouraging customers who have been approved to take-up their loans.\u00a0\u00a0Neither of these strategies would have a negative impact on the other teams.\u00a0\u00a0In fact, if the marketing team chose to focus its efforts on reducing the rate at which customers left the bank, both the marketing team and the product team could benefit.<\/p>\n
Secondly, consider the interaction between a team and its changing environment.\u00a0\u00a0Goals set using the top-down process usually change in gradual steps \u2013 coming into being after one summit meeting and remaining in force until the next such meeting.\u00a0\u00a0The environment, however, is more dynamic.\u00a0\u00a0This can lead to confusion and conflict as team goals diverge from \u2013 and are emphasised at the expense of \u2013 organisational goals.\u00a0\u00a0Fortunately the single, widely-held goal of profit optimisation not only reduces inter-team conflict, it also increases goal consistency and goal relevance over time.<\/p>\n
When times are good, the marketing team might be encouraged to increase market share by targeting slightly riskier populations.\u00a0\u00a0However, risky growth becomes unprofitable as soon as the market experiences a downturn.\u00a0\u00a0It is easy to see how a conflict between the interests of the team and the interests of the organisation could have arisen if they were measured against a static goal based on the growth in the number of new accounts while the environment changed around them.\u00a0\u00a0Profit, on the other hand, is a fluid goal.\u00a0\u00a0In this case, as soon changes in the environment make a conservative strategy more profitable, the marketing team could adapt quickly by, for example, abandoning their initial growth goal in favour of a risk-minimisation goal.\u00a0\u00a0Although the goal remains the same \u2013 to maximise profit \u2013 the optimal means of achieving it will vary just as surely as a mountaineer attempting to summit Everest might need to adjust their route to compensate for changes in the prevailing weather conditions.<\/p>\n
One simple way to visualise the profit model is as a pyramid.\u00a0\u00a0Each layer of the profit model pyramid expresses the layer above it in finer detail.\u00a0\u00a0So, on top of the pyramid is profit which is the result of all the activities of an organisation.\u00a0\u00a0Profit can, most simply, be broken into revenue, variable costs and fixed costs and so the next layer down is made-up by these major profit levers.\u00a0\u00a0Each of these profit levers is, in turn, made-up of more detailed profit levers and so on.<\/p>\n
Regardless of the budgeting process employed, each team is likely to be given one overriding goal.\u00a0\u00a0The success of each team is then measured by their ability to meet a pre-set target that is represented by a measurable metric that resides somewhere in the pyramid.\u00a0\u00a0The further down the pyramid that a measurable metric resides, the more likely a goal based on it is to be counter productive across teams and to become variable over time.<\/p>\n
Returning to the example of the marketing team, they might be measured on the number of new applications (level three), the number of active accounts (level two) or profit (level one).\u00a0\u00a0A marketing team with the \u2018level three\u2019 goal of increasing the number of new applications will be in continual conflict with a risk team measured on the opposite and competing \u2018level three\u2019 goal of minimising the number of accounts in default.\u00a0\u00a0There will be less conflict if both teams are measured on \u2018level two\u2019 goals \u2013 such as number of active and up-to-date accounts and accounts in default as a percentage of all account balances \u2013 but the conflict will only be resolved entirely when both teams are measured according to the \u2018level one\u2019 goal of profit.\u00a0\u00a0The unified goal of profit optimisation will alter the relationship between these two teams from adversarial to cooperative.<\/p>\n
Making profit the unifying goal of all teams does not mean that all teams are evaluated on the overall performance of an organisation, however.\u00a0\u00a0The usual rules about effective goal setting still apply and such a broad-stroke approach would make it difficult for team members to identify the link between their efforts and the fruits thereof.\u00a0\u00a0Rather, it means that each team should be evaluated on its ability to maximise profit by implementing projects that positively impact those parts of the profit model over which they exert some control.<\/p>\n
To do this, the organisation must follow a simple three step process.\u00a0\u00a0The first step is to reach agreement on the make-up of its profit model.\u00a0\u00a0Teams should agree on which profit levers to include in the profit model as well as the way in which those levers interact.\u00a0\u00a0The second step is to identify which teams impact which profit levers.\u00a0\u00a0Most teams will have a primary impact for a small number of profit levers and a secondary impact on a few more.\u00a0\u00a0(Note<\/em><\/strong>: A profit lever with no identified \u2018owner\u2019 points towards a weakness in organisational structure, as does a profit lever with too many owners<\/em>)\u00a0\u00a0The third step, once the breadth of a team\u2019s potential impact has been established, is to ensure that every project implemented by a team includes processes to monitor and aggregate the performance of all of the profit levers under its influence.<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" Using Profit Model Analytics to Align Team\u00a0Goals One of the business world\u2019s most repeated truisms is that you get what you measure.\u00a0\u00a0So it stands to reason that, if the goal of an organisation is to maximise profit, a unit\u2019s contribution to that profit maximising effort should be the primary measure against which it is evaluated. … Continue reading Using Profit Model Analytics to Align Team\u00a0Goals<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":1794,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25],"tags":[32,37,26,54,46],"class_list":["post-1793","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-bookmarked-articles","tag-analytic","tag-banking","tag-data","tag-data-mining","tag-retail-banking"],"_links":{"self":[{"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/posts\/1793","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1793"}],"version-history":[{"count":2,"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/posts\/1793\/revisions"}],"predecessor-version":[{"id":1796,"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/posts\/1793\/revisions\/1796"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=\/wp\/v2\/media\/1794"}],"wp:attachment":[{"href":"https:\/\/mintea.blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1793"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1793"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mintea.blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1793"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}