Tuesday, September 12, 2017

Strategic Planning Analogy #572: Outcomes Vs. Objectives

There is a company I know of that desired two outcomes. First, they wanted a product mix skewed towards new products. Second, they wanted high returns on their investments.

So this company turned these desired outcomes into their goals. Then they set metrics around these goals in order to encourage compliance in new products and high returns.
Here’s what they got:
  1. In order to meet the metric of having a high percentage of their products being new, the management discontinued a number of very viable and profitable older products, merely because they were old.
  2. When they looked at the risk profile of their portfolio, they discovered that the riskiness had skyrocketed. As it turns out, high returns tend to come from high risks. By bypassing wonderful projects that would have exceeded their capital to focus on only the highest return options, they horribly skewed their riskiness.

So even though the company tried very hard to focus on the right outcomes, they created an environment which ironically created the wrong outcomes.

Desiring great outcomes is a wonderful thing. There is nothing wrong per se in wanting lots of new innovations and having high returns on investments.

The problem occurred when this company turned their desired outcomes into company objectives.
Objectives are the things you want people in the company to do. Outcomes are net results of what happens in the marketplace based on what you did.

Objectives and outcomes should not be the same thing. When companies try to make them the same thing, they end up like the company in the story: They get lousy objectives and undesirable outcomes.

This distinction is critical for strategic planning. Strategic Planning tends to have a great deal of influence on what are the outcomes and objectives pursued by the company. If strategic planners get this wrong and make them the same, the company is doomed to repeat the errors in the story.

The principle here is that if you want great outcomes, you need to have objectives which are different than the outcomes.

Why it’s Wrong To Make Higher Profits an Objective
Let me give you an example. Let’s say you want an outcome of higher profits. In most cases, that is a good outcome to desire. However, the best path to higher profits is rarely to make higher profits your objective.

Here’s what typically happens when you make profits your objective.
  1.       A group of managers go crazy on cost reductions. They’re so busy cutting costs that they ruin your quality or ruin your service or stop investing in the future or have product shortages or miss deadlines, etc.
  2.       Another group tries to get incremental sales at any cost. This usually results in unprofitable price wars, actions which alienate core customers, trying to be a one-size-fits-all solution which results in being a never-the-best-solution-for-any-customer solution, etc.

The problem is that higher profitability is too abstract and too numerical. It leads people to work on moving the numbers rather than doing the things that actually lead to higher profitability. In most cases, enduring higher profits come the following types of activities:

  1.        Having a superior solution to what is being offered in the marketplace.
  2.        Having a unique business model which produces this solution in a way that is both better than other people’s business models AND is difficult for the competition to imitate.
  3.       Having superior access upstream to suppliers/partners and superior access downstream to distributors/customers.
  4.       Having the best employees.
  5.       Having a clear and simple message as to why your offering should be preferred as well as an organization focused on being the best at delivering on the promises of that message.

You don’t see the word “profitability” in any of those activities. However, if you want enduring profitability, these are examples of the types of activities you should be focused on. Therefore, if you have higher profits as your desired outcome, don’t also make it your objective. Instead center your objectives around tasks like those in the second list.

Have the Metrics Match the Objectives, Not the Outcomes
It is a well-known fact that people tend to focus on achieving the metrics which trigger their rewards. If your metrics are focused on the outcome, then you will get the mess we saw in the beginning story. However, if you focus the metrics on the objectives, then you will get people working on the very activities which lead to your desired outcomes.

Yes, I know that outcome-related metrics are typically much easier to set and to measure. Profits are a lot easier to measure than the superiority of a business model. But just because it is easier to do doesn’t make it right.

As we saw in the story above, when you measure “% of product sales that come from products less than 5 years old” you get people eliminating great products merely because they are more than five years old. Although this metric sounds like your outcome, it does not achieve your outcome.

To get the desired outcome, you may need measurements focused more on objectives. It could be something like “the number of products in the innovation pipeline today that are successful launches over the next two years.” Yes, that is a much messier metric, but it gets closer to the core of what you really want people to do to ultimately achieve your outcome.

I worry about this point a lot, because these days a lot of strategic planning departments are housed in finance. Finance people have a natural inclination to want to measure outcomes. That is what a CPA is trained to do. But is the absolute wrong thing for a strategic planner to do. They need to measure the inputs—the things that create the great outputs.

If you are measuring outputs as your metrics, not only are you measuring the wrong things, you have the wrong time frame. By the time you have the outcomes, it is too late. You cannot have any strategic impact on them. Once you know the profits for the year, it is too late to improve them. That’s why you need to measure the tasks or objectives which impact profits.

Wells Fargo
Wells Fargo recently got into a lot of trouble because they did not heed the advice of this blog. Wells Fargo desired the outcome of having a lot of customers with multiple accounts. There are many reasons why this can be a very good outcome. It creates economies of scale and it makes customers a lot stickier (harder for them to leave).

The problem occurred when Wells Fargo made getting customers into multiple accounts the company objective. By placing the major incentives around creating multiple accounts, employees did whatever it took to get those accounts established, including the creation of millions of accounts without the authorization of the customer. The end result was executives losing their jobs, destruction of the quality of the brand name, significant losses (customers and profits), etc.

Instead of having an objective be to create a lot of multiple accounts, the objective should have been to so be in tune with their customer’s needs and desires that the customers willingly want to sign up for those multiple accounts. That could include measuring activities like:

  1.       Finding out what types of additional products the customers want.
  2.       Coming up with more efficient ways to create and deliver these products than other alternatives.
  3.       Making sure the benefits of bundling for the customer are clearly superior to the customer getting these services from multiple suppliers.
  4.       Making sure the portfolio of offerings is consistent with the brand and improves the brand (and does not confuse the customer as to what the brand Wells Fargo stands for).
  5.       Making sure people are not turned away from Wells Fargo due to heavy pressure sales.

Outcomes and objectives are both important to a business. But that doesn’t mean they are the same thing. Objectives are what you want people to do. Outcomes are the results in the marketplace based on what you have done. Ironically, if you want to achieve your outcomes, you need to develop objectives which are different from your outcomes. And this includes developing your metrics around objectives rather than outcomes. If you don’t, people will chase the wrong numbers in the wrong way and destroy the business.

Getting a company to properly grasp the difference between outcomes and objectives may be the single most important thing a strategic planner can do. I guess we can put that on their list of objectives.