Strategic Planning Analogy #572: Outcomes Vs. Objectives

THE STORY

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.

THE ANALOGY
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
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.

SUMMARY

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.

FINAL THOUGHTS
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.

Strategic Planning Analogy #478: Casual Day Stickers

 

THE STORY
I worked at a company where every department in October was expected to come up with a way to raise funds for the United Way charity.  One year, our department decided to sell “Causal Day” stickers.  The idea was that if you bought and wore one of these stickers, you were allowed to wear casual clothes to work on that day of the week (not just on Casual Fridays). 

We went around the company trying to sell these stickers.  In many departments, we were unable to get much interest in buying the stickers.  However, when we got to the IT department, we were treated like heroes.  The IT people were buying as many stickers as we had.  They loved the idea of being casual every day and were willing to pay a lot for the privilege. 

We learned from that experience, and in future years we focused our time in the IT department, so that we were more productive in selling those stickers. 

 

THE ANALOGY
Even though we all worked for the same company, we had different levels of demand for Casual Day stickers.  Some placed a high value on those stickers, while others saw little value to them.

This shows the point that not everyone is wired the same way.  Different things motivate different people.  If we try to treat everyone exactly the same way, we will not get exactly the same results from each person.  What motivates some will de-motivate others.

For strategic planning to be successful, one needs to go beyond merely having good ideas.  One also needs to find a way to motivate people to embrace and implement the good ideas.    And since people are motivated by different things, a one-size-fits-all approach to motivation is not the optimal way to get a strategy implemented everywhere in the organization.  

 

THE PRINCIPLE
The principle here is that strategic objectives and tactics do not have to be treated the same way, and in fact should be treated differently. 

Unified Objectives

The overall strategic objectives need to be relatively unified.  This is because a company is more likely to own a position if everyone in the company is moving in the same direction to support it.  For example, if your strategy is rooted in low cost, low price, then you need the majority of the company’s effort moving in the direction of lowest cost and lowest price.  Otherwise, activities counter to that objective will creep into the company and dilute the objective. 

For example, if half the company is pursuing lower cost and another half is pursuing higher service, then you will probably lose on both fronts.  There will be more focused competitors winning on the low cost front and other focused competitors winning on the high service front.  As a result, by having some people trying to win on both fronts, you end up winning on neither front.

That is why a unified focus is so important for key strategic objectives.  Trade-offs need to be made in order to win competitive superiority on these objectives.  And if the company is not focused on making the same trade-offs, you will not win your objective.  One person’s action will counter another’s action.  This will confuse the customer as to what you stand for, so you will not really stand for anything.

Diversified Motivation Tactics

However, just because objectives need to be the same across the business does not mean that the motivational tools needed to get the objectives accomplished need to be the same across the business.  In fact, as we saw with the Casual Day stickers, an approach which motivates very well with some areas may be totally ineffective in other areas.  If I tried to motivate the entire company to meet an objective with Casual Day stickers, I’d probably get great compliance from the IT department but not from many other areas.

Therefore, tactics to motivate the larger objective need to be customized for the particular people being asked to achieve the objective.

Over the years, I have had the privilege of managing a wide variety of people.  At one extreme, I’ve managed accountants who tend to prefer predictability, rules and the comfort of routine.  On the other extreme, I’ve managed creative-artistic types who hate predictability, rules and routine. What motivated one group de-motivated the other.

I learned that I needed different motivations for all the different types of people I’ve managed over the years.  Some were motivated by money, some titles, some freedom to work on their own pet projects, and some a break from working on any projects.  So the irony is that the best way to get unified outcomes is to have diversified motivations for the inputs.

Freedom Vs. Regulation

Some experts try to frame business issues as an “either/or” argument:  either you promote freedom OR regulation.  But business life is not a unilateral process.  For major objectives, regulation is more desirable; for motivating tactics, freedom is more desirable.

So the question is not Either/OR; the question is Which/When.  In other words, which areas deserve a particular approach at what times?  Yes, freedom and regulation are both valuable tools.  A company using only one approach all the time will sub-optimize.  However, using both approaches randomly sub-optimizes as well.  Each has a place where it is appropriate and where it is not appropriate.  Great companies figure this out and use them appropriately to gain advantage.

I was reminded of this in reading an article put out recently by McKinsey and Company.  In the article, they talked about the success of an “envelope” approach to getting things done.  The envelope approach works like this.  The envelope represents the space in which the company wants to operate.  The dimensions of the envelope are rigidly defined.  You are not to act outside the dimensions of the envelope.

By contrast, great freedom was given for how an area operated within that envelope.  As long as an area of the business stayed within the envelope, there were given great latitude as to how innovate and thrive.  This envelope approach has been successful for those firms which can abandon the either/or approach and embrace which/when. 

So, using the McKinsey language, strategic objectives become the dimensions of your envelope and as long as your motivational tactics fit inside that envelope, you have great freedom to do what works best in your area.

 

SUMMARY
Freedom and rigidity both have their place in business, but it is not the same place.  Rigid structure is needed to define the major strategic objectives.  This same rigid structure needs to hold for the majority of the business.  However, just because rigid universality is needed for defining the objectives does not make it appropriate for everything else.  When it comes to motivating people to deliver on that objective, usually the opposite is more appropriate.  Great freedom and diversity tends to get the best effort towards the major objective.

 

FINAL THOUGHTS
At that same company where I sold Casual Day stickers, our department would always have a big problem this time of the year.  We would try to plan a department Christmas party.  About half of the group wanted to make it a fancy evening affair where we would dress up and bring our spouse.  The other half wanted to make it a simple lunch catered in at the office building (no dressing up, no spouses).  The problem was compounded by the fact that each half tended to hate the preference of the other half.  So even within the same department, motivations and preferences can vary widely.  One person’s pleasure can be another person’s torture.  So be sensitive to the diversity.