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August 24, 2015

Get Rich or Change the World: Profit vs. Impact

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Not long ago, I was on a plane to DFW, seated next to an executive headed home after meetings in Northwest Arkansas. “How’d it go?” I asked.

After a little news, weather, and sports (light, usually shallow, safe chatter), we started talking about how success is being measured differently today than a few years ago. He explained that his product grid currently had only two measurables—velocity and margin. In other words, how fast something left the shelf  (velocity) and how much money that item profited their company (margin).

Some products, after all, make a ton of money but they sit for months. Other products don’t have much margin, but they’re flying off the shelves. Both of those scenarios have some value, but the true win-win product champions for the company are products that have a high margin and move fast.

This simple structure (just two variables) stirred my thinking about two other conversations I’ve had in the last few weeks—one with Brad and the other with Don. They also were working on solving a couple of problems.

Brad was trying to create a grid to grade outside investment opportunities, and Don was creating a filter to evaluate internal initiatives of his company’s 5-year plan.  Both CEO’s were gospel-minded, wanting their faith to shape their thinking of success outcomes. So, I offered the following:


 

One assignment that never goes away for a leader is figuring out where to direct resources for the best return. The question might be circling around an acquisition you have been chasing for a year. Or it could appear because you are being asked to fund or support a cause or friend. It could be a new flashy start up in your hometown that seems perfect for your involvement. Or you could be evaluating the performance of strategic initiatives inside your own company.

Knowing where to place our “bets” is not an easy thing. As Gordon Bethune, the former CEO of Continental Airlines said, “Most businesses fail because they want the right things but measure the wrong things, and they get the wrong results.”

But if you can filter through all the noise and focus on the right variables, decisions become much easier. And two things to measure are impact (or mission) and profit (or revenue). I know they are not the only things but they certainly can help guide ROI in a consequential way.

Some observations:

  1. Measuring the past is always easier than forecasting the future.
  2. Impact or mission return is usually harder to measure than dollar return.  But that should not keep us from trying.
  3. Ideas, products, and companies that are in the top right quadrant (high mission/high revenue) don’t come by very often. Most early stage pitches present themselves as this but few become this. Be glad if you get a handful in a lifetime.  
  4. Most of us would never willingly invest in something that was a double negative loser. In other words, if you knew the company pitching you or the idea being presented to you was going to have horrifying dollar returns (a dramatic financial loser) and had no clear mission impact (having no impact at all…anywhere…on anyone) you’d give a quick “No thanks.”
  5. The top right (high impact/high profit) and bottom left (low profit/low impact) usually is not where we spend most of our effort. Most of the things that we invest in are either in the top left (high impact/low profit) or bottom right (high profit/low impact).
  6. But keep in mind that your involvement might be the missing link to push a company into its highest yield quadrant.

The next time you’re sitting at a table waiting on someone for lunch, grab a napkin and start doodling. How do the items in your world fit into the profit/impact grid? If you serve on a board, run the organization through the grid. If you own a company, run your leadership though this grid and then apply it to your forward initiatives and investments. Or just do a quick personal audit. How do your time and money investments sort into the four quadrants for the best return?

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