Do You REALLY Understand Value? The bedrock of team success

Episode #261 Do You REALLY Understand Value? The bedrock of team success

CORE VALUE PRINCIPLES

There are a number of core principles around value. Until you understand these, you’ll struggle to really home in on the things that make the most difference. None of the decisions on value are simple, which is why it’s so important to consider these principles deeply. This is the work of leadership.

I produced a podcast quite early on that’s really worth listening to: it’s Ep.42, First, Create Value. The episode covers key value concepts like the time value of money, discounted cashflow, the lifetime value of a product, and how to know where you should spend your time.

Let me start by outlining three important principles for understanding value.

1. The difference between value and cost.

Many leaders think that the best way to create value is to cut costs and, in many cases, this can help. Knowing the most basic business formula: (Revenue – Costs) = (what you get to keep), tells us that cost is vital. But often a cost focus destroys value.

For example, I might decide to save money by cutting some customer service staff. This might seem like a good idea at the time, and earnings might increase, at least initially. But this decision might lead to lower customer satisfaction, and I might lose one or two really big customers.

Let’s say I managed to save $500,000 in wages. Hey, that’s awesome, right!? But if I lose a customer with a lifetime value of $15m, that decision would prove to be massively value destructive.

The tricky thing is that, at the time of making the cost-cutting decision, the impacts on your customer base are really hard to predict. This is why many leaders go for the ‘bird in the hand’ principle, and worry about the consequences later. That’s likely to be someone else’s problem.

2. The balance between long-term and short-term value.

I know this has been done to death, but I just don’t know of any better example than Kodak.

Funnily enough, Kodak developed the first digital camera in 1975 and, at the time, they didn’t want to take it to market. Why? Because it would’ve cannibalized the sales of their most profitable product, 35mm film. That was their cash cow.

The management team got paid their bonuses based on that growth and profitability. So, in the short term, it was a no-brainer for Kodak to sit on the digital technology that it owned. In the longer term, when digital cameras became pervasive, Kodak was too slow to respond, and it sunk like a stone.

At its peak in 1996, Kodak’s revenues were $16bn, with an enterprise value of over $30bn. Not quite 15 years later, when it filed for bankruptcy, Kodak had an enterprise value of less than $150m. That’s absolutely astounding–especially for a market leader with an innovative culture–but it perfectly illustrates the fallacy of focusing only on short-term value at the expense of the long-term.

3. The trade-offs between quantitative and qualitative value.

Some value calculus is really easy to perform. For example, investing in a new manufacturing plant is pretty simple, in relative terms. If I invest $50m in capital, the factory will produce 10,000 widgets a week, which we can sell for $10 each at a net margin of 20%.

Of course, a lot of assumptions sit behind this simple statement, but it’s quantitative all the same. When you’re deciding where to put your scarce capital (because you have to make choices, of course), it’s easy to see the relative value of each potential opportunity when they’re this quantifiable.

But if you’re running a bank, say, how do you decide how much to invest in compliance activity (like anti-money laundering and counter-terrorism financing)? You could spend almost nothing, and have no breaches, effectively getting away with it.

Or you could spend $50m, and still not completely mitigate the risk. It’s a judgment call and it’s a qualitative decision.

So deciding how much to spend when the activity is qualitative is hard enough, but when you try to make decisions on whether to spend on building a new factory or making safety modifications to your existing assets, it can be a real mind-bender. You’re not comparing apples with apples… it’s not even fruit. You’re comparing meat and nylon.

No matter what level you’re at, a key part of your role as a leader is to understand what your team can do to maximize value delivery for your organization. Then, dedicate all your resources to that.

WHAT DOES A VALUE-DRIVEN CULTURE LOOK LIKE?

Once you know what it is that genuinely creates value, there are a few key principles that are going to enable you to go after it. The object of the exercise is to build a value-driven culture, and unless you really understand and go after these principles, you’re not going to be able to create one. There are three that I’m going to look at in particular:

1. Traceability of value.

If you know what creates value, that’s fine, but you’ve got to be able to see where that value appears. Quite often, we’ll do something because it sounds like a good idea and it should create value… but then it does absolutely nothing to improve our results.

You’ve got to be able to see the result, so you’ve got to be able to trace that activity from the investment right up front. If I’m investing time, money, people, and assets into doing anything, I’ve got to know where that pays me back.

I’ve got to be able to see when and where that value arrives. Will I see it in my financial results? Will I see it in better staff capability and performance? Will I see it in fewer compliance transgressions? Will I see it in fewer safety incidents and injuries?

There’s got to be a clear line between investment of resources and recovery of benefits.

2. Value ranking.

Once you understand what your options are for investing your resources, you’ve got to work out which ones are going to give you the biggest bang for buck. Your objective is to pull the biggest value levers that you possibly can, in all the areas of value you’re trying to create.

If you know what the value is that comes out the back end, you can start to have that discussion. Is this more important than that? What if we were to do this and not do that? You’re talking about how to focus on the most important things.

Most planning processes try to assign priorities, so we prioritize things. We give them priority one, two, three, and four. Have you ever heard anyone say to you, though, “Hey, Marty, I can’t possibly take anything else on. I’ve already got six priority ones.” Happens all the time.

Value ranking is going through the discipline of saying, “This is number one, this is number two, this is number three, this is number four”.

If you truly believe that you’ve managed to get this right and that you understand the value that each of these investments of resources might yield for you, then it’s a no-brainer. If you nail those top three, four, five things, then no one cares if you get to number 46 or not, because you’ve delivered on the things that are most important.

We all try to do too much for all the right reasons. We want to do as much good as we can. The problem is, taking on too much work just distracts us, and we put the biggest value things at risk. Most organizations don’t do this well.

Just remember though, you’re not looking for the perfect list. That’s not the object of the value ranking exercise. The object of the exercise is to learn about what you’re dealing with, through the robust debate that it involves. Different people are going to see value in different places, and discussing that in a room where you can understand better where your value is going to come from is the object of the exercise.

You’ve probably heard me use the Dwight Eisenhower quote before, “Plans are useless, but planning is indispensable.” This applies perfectly to value ranking.

3. Simplicity and focus. Once you’ve worked out where those biggest value levers are… stop everything else. Stop it! Don’t do all the sh!t that doesn’t add value. Most organizations do so much that just doesn’t end up anywhere. It doesn’t deliver anything tangible. It’s just a waste of your resources, so find a way to stop it.

I’ve got to say, during my corporate career as an executive, the hardest thing I ever tried to do was to stop the activity that had already started. You’ve got to nip this in the bud and your first best opportunity to do this is in your planning cycle.

6 barriers to value delivery

What’s going to stop you from delivering value for your organization? In most companies I’ve seen, there are significant barriers to value delivery, some of which are absolutely baked into the culture. I just want to take you through half a dozen of my favorites:

1. The rusted-on activity of the business.

So much stuff gets done just because it’s always been done. Every year when the company goes through its budgeting and planning cycle, the baseline is all the things we’re doing now… and then on top of that, other stuff gets added in, because everyone’s always full of good ideas for how to improve things.

Projects and initiatives are justified, money and people are allocated, and the work program expands. You’ve all been there. That’s why I’m a huge fan of zero-base budgeting. In this scenario, you get to question everything, and if your people can’t explain exactly when and where the value’s going to turn up, it has to be ruthlessly culled.

2. The inability to articulate value.

If you don’t know, with a high degree of clarity, what things drive the most value for your business, how on earth are you going to tell your people what to do to deliver more value?

But, if everyone knows what represents the greatest value, then they’re much more likely to make a smart decision in the heat of the battle about what to focus on. And in any organization, regardless of size, you can’t make every decision for your team. You need to know that they have the parameters to make good decisions about where to place your scarce resources.

Think about this from your current perspective. How well do you understand the value drivers of your organization? How easy is it for you to translate that into direction for your team? How easy is it for you to tell them what you want them to focus on at any given moment? Do you know what things to stop, because they simply aren’t valuable enough?

3. Lack of measurability.

This is an absolute classic. Sometimes we intuitively sense that a particular activity is valuable, but there’s absolutely no way to work out if it actually creates value.

The perfect example is safety. You might think that any investment into the safety of your people is a no-brainer. Not so fast. I’ve had executives say to me in the past, “Marty, we need to invest millions of dollars into our safety systems”. My obvious question is, “When and where will I see the value from this investment?”

“But Marty, it has to be done to make our environment safer”. No. It doesn’t.

If you can’t show me how it ultimately reduces the number of incidents and injuries that we sustain, then there’s no value in the investment. You’re just polishing knobs. If you’re not clear about this, you’ll end up measuring the means rather than the ends.

4. Excessive politeness.

Most teams are simply too polite. There’s no robust challenge of statements, opinions and decisions. This is, in fact, my biggest bugbear with the popular notion of a high-performing team.

I’ve heard any number of leaders claim that they built a high performing team based on the absence of conflict. These are not high-performing teams. They are polite teams, where no one speaks about the obvious flaws and problems for fear of offending one of their teammates. That’s generally the sign of a really mediocre team.

I’m not saying you should provoke animosity. What I am saying is you need to embrace a culture of robust, respectful challenge that enables you to create and hold productive tension. This is where you’re going to find performance, and this is where you’re going to find value. The biggest disagreements in a high-performing team should be, “Where do we need to focus to deliver the best outcomes?”

5. Perfectionism.

The principle of excellence over perfection is critical in being able to capture value. Even if you manage to get a pretty good sense of the highest value things, they will wither and die on the vine unless you can execute with a sense of urgency.

Perfectionism slows your people down to glacial speed. It’s the value equivalent of sclerotic arteries where the blood simply can’t pass through. In the case of value, perfectionism is the plaque in your arteries. Nothing’s perfect, so you need to build momentum in your team. “That’s good enough, keep going, we can adjust as we go.”

Perfectionism is the enemy of value.

6. Self-interest.

Self-interest drives people to do a lot of things that destroy or dilute value. For example:

• setting soft targets to make it easier to meet your KPIs;

•  focusing only on the short-term, and neglecting long-term value; and

•  wanting to maintain the size of your team so that you don’t lose status, power, or money.

Let’s face it, no one wants to shrink their team, but psychologically this puts you in a very interesting place, where you’ll prop up low-value work to maintain your position. It really takes something special to put all of this aside and just drive ahead to deliver maximum value for your company. But this is where extraordinary performance is born.

To help you work through these organizational barriers, we’ve created a free PDF downloadable that has the Six Barriers to Value Delivery.

DO WHATEVER IT TAKES TO DRIVE GREATER VALUE

Bringing this all together, value really has to be at the center of everything your team does. Otherwise, to paraphrase Peter Drucker, you’ll end up brilliantly executing on a bunch of things that you shouldn’t be doing in the first place.

At Your CEO Mentor, we are so focused on helping leaders to get this right that the first and most comprehensive module in our flagship 8-week program, Leadership Beyond the Theory, brings a razor-sharp focus to mastering the value equation.

There’s a wealth of tools and strategies here to help you identify and rank value. And, once you know what the highest value things are, to work out how to get your team to deliver them with an unprecedented level of excellence.

Learning how to pull only the highest value levers and, importantly, to stop doing all the other crap is a life’s work. So this is one area where the lifetime access to the content in Leadership Beyond the Theory comes in particularly handy.

I spent most of my corporate career in the fanatical pursuit of value… and it paid off. You simply can’t deliver a year-on-year earnings growth rate of 125%, as I did at CS Energy, without a serious level of energy, focus and commitment to driving value.

If you can work out how to get the value piece right, you’ll find that you’ve developed a formidable weapon to cut through the noise. Your people will feel a lot less like that small cog in the big wheel. They’ll start to see how their effort makes a difference and how it contributes to the bigger picture. This is the start of a virtuous cycle, which is self-perpetuating.

And one day you’ll wake up to find that your people love their jobs, and they’re more than happy to put in the discretionary effort that you’ve always hoped for.