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Want to tank your profit margin? Just do a successful merger!

A fable of Maximus Grandeur, CEO of Gaping Maw Co^[1].

Think you understand “synergies”? Think again. Most people don’t. Synergies can happen. The boost revenues and profits, but tank profit margin. In fact, math often guarantees it. Here’s an example.

In the Beginning

Consider two standalone companies. Milk Co and Ice Cream Co.

Milk Co makes $9 million profit on revenues of $300 million. That’s 3% profit.
Ice Cream Co makes $2.5 million on $50 million. That’s 5% profit.
Gaping Maw Co is a large food company that makes $80 million on $1 billion in revenues. That’s 8% profit margin.

Enter Maximus Grandeur, Gaping Maw Co’s new CEO. He’s been feeling inadequate in the bedroom, so in a misplaced attempt to shore up his self-esteem and fool himself into believing that he has agency in life, he buys the two companies to feel big and powerful. Publicly, he talks about “synergy.”

Just the Math, Ma’am

The acquisitions happen. He makes no other changes.

Maximus just screwed Gaping Maw’s profit margin. The new profit margin is (all numbers in millions):

($9 milk + $2.5 ice cream + $80 legacy)/($300 milk + $50 ice cream + $1000 legacy) = 6.78%, down from 8%

Let that sink in: for purely mathematical reasons, having nothing to do with actual business operations or performance, consolidating two businesses under an umbrella business mathematically decreased the umbrella company’s profit margins.

BUT WAIT! What about synergy? That was Maximus’s publicly-stated reason for suggesting the acquisition.

The Synergy is Real

The Maximus synergy is for Ice Cream Co to buy all their milk from Milk Co instead of other suppliers. He proclaims this brilliant strategy in the annual report, to rescue the profit margin. He implements.

The new, synergy picture is this: $10 million of purchases that Ice Cream Co would have spent with other milk companies now goes to Milk Co, which will make its normal 3% profit on all those tasty new purchases. Everything else remains the same:

Milk Co makes $9.3 million profit on revenues of $310 million. That’s 3% profit.
Ice Cream Co still makes $2.5 million profit on $50 million. That’s still 5% profit.
Gaping Maw Co’s legacy businesses still make $80mm on $1Bn, for 8% profit.

Considered individually, each division is doing as well or better than before the merger.

Each division is doing just peachy. In fact, Milk Co is doing better in terms of absolute sales and absolute profit. That means that Gaping Maw has $10 million more in revenues, and $300K more in profit. Each division is as healthy as ever!! Healthier, even!!

Sounds like a win, right? Wrong.

But Synergy Makes Everything Worse

Because now Gaping Maw Co’s profit margin is (all numbers in millions):

($9.3 + $2.5 + $80) / ($310 + $50 + $1000) = 6.75%

Synergies were realized, and it made the profit margin even worse.

Yes, you read that correctly. The synergies were realized, and it pushed the profit margin lower^[2]! From 6.78% to 6.75%.

As a conglomerate, the profit margin has gone down, even as the absolute dollar amount of profits has gone up.

Here’s How to Think About It

Here’s why: intuitively, business units with lower profitability than the overall company drag down the overall profitability margin. The more revenues come from low-profitability businesses, the more overall profitability sinks, even though the business is doing better.

It’s also possible to acquire a high-profitability business that boosts overall profitability while absolute revenue/profit numbers may decline. It’s the math; it’s not about how efficient or well-run the business is.

But all the market cares about is profit margin of the overall company. So your stock price will tank, the CEO will get fired, and Maximus will take his golden parachute (equivalent to the last ten years’ profits of all three companies combined) and retire.

BUSINESS MORAL: Know the math before you acquire or “synergize.” Know the absolute numbers and the margin numbers. Assume investors will only pay attention to overall profit margin, which means they might push you to do dumb things to maximize that number. Don’t listen. If you’re going to do dumb things, at least do your own dumb things.

PERSONAL MORAL for Maximus: If your sex life is unsatisfying, maybe you’re spending too much time at the office. Regardless, don’t take out your frustrations on innocent companies that are doing just fine.

This article is emphatically not about CVS, even though it was inspired by reading that CVS is going to axe 2,900 jobs and possibly split up their insurance and pharmacy businesses to "improve financial performance. ↩︎
The real problem here is that we demand steady or growing profits when viewed as a percentage return. It is beyond the scope of a simple essay to give this topic the treatment it deserves. ↩︎

3 Keys to Effective Communication

Business, communication, culture

Beginnings matter. Whether you’re an executive communicating a leadership message, a team leader building morale, or a solopreneur bringing your self to market, you’ve got something important to say. But. If you’ve got a great product/message/idea but can’t communicate it clearly, you’ve lost before you even get started. A decade’s worth of writing Get-it-Done Guy scripts taught me some things about clear writing.

This week I’ve seen a resume, an investor pitch deck, and an article that were full of great information. All three were presented in ways that would cause eyes to glaze over, because they were nothing but a mass of details.

The opening sentence and framing are the key to effective communication:

Know what you want to communicate. Can’t write it in a single sentence? You either don’t have the sentence yet, or you’re trying to do too much.
Start with a big picture statement that makes someone want to read more. Show your audience why it’s relevant. If you’re writing for multiple audiences, this can be the hardest thing to write, since you’re motivating multiple audiences who may have different, competing agendas.
Eliminate jargon and acronyms. If your big picture statement is “Our ACRS system is adding an unprecedented 240 basis points to our operating earnings,” and your audience doesn’t know what ACRS is, what a basis point is, or what operating earnings are, then you’ve lost them before you’ve begun.

It only took a few sentences, applying these tips, to make all three pieces of writing much more engaging.

AI is Computerized Theft. Today, it’s Zoom

Business, entrepreneurship, Misc

Zoom, the video conference company, just updated their Terms of Service. Section 10.4 lets them use your meeting content to train machine learning and AI models.

They could use this to duplicate your expertise, if you deliver your expertise via Zoom.
This could put you in violation of the law if you’re in a privacy-regulated profession.
Zoom says they’ll asked for consent first, but they don’t say how. It could be as deceptive as “You must click Accept on our updated terms.”
I’m looking for privacy-protecting alternatives to recommend.

The background.

Does Machine Learning really duplicate expertise? Yes.Machine learning is the new hot topic in Silicon Valley. It is a statistical analysis method that uses large data sets to create computer programs that can predict things. For example, medical diagnosis systems would be given a huge number of medical cases. Each would be given the symptoms, the eventual diagnosis, and whether that diagnosis was correct.

With enough data, the system would be able to diagnose as well as (or better than) any of the doctors who provided the training data.

Getting enough high-quality data is the key to building a model that works.

Cloud services are using user data to create and “steal” those users’ product. Adobe has released truly astonishing new capabilities in their image processing program Photoshop. The latest Photoshop can fill in blank spaces in images, as if by magic.

How did the AI get that ability? By training on images that graphic designers had stored in the Adobe Cloud over the last decade.

The Terms of Service did say, buried somewhere in several dozens or hundreds of pages of legalese, that data stored in the Adobe Cloud could be used for the creation of new products and services.

I think it’s highly unlikely that (a) users knew that clause was there, (b) users understood the implications of letting Adobe train an AI on their images (implications that Adobe can now duplicate their work) (c) users thought that a cloud service, which is usually a storage product, would be used to train an AI for delivery in a separate product.

Is this theft? Legally, probably not. But morally and ethically, I use a different test: if the users of Adobe Cloud had been told “we will use any image you store with us to train an AI to be able to generate similar images without paying photographers or designers royalties of any sort,” I’m fairly sure most people would have opted out. They probably would have said “You mean you want to steal my images and design style? Hard pass.”

This is playing out right now in Hollywood. The actors’ and writers’ strike shows that when people understand that they’re being asked to give away their creative work for free, they refuse. The actors and writers are simply asking for protection against exactly this sort of AI duplication of their work and likeness.

Does one person’s data really matter? If Zoom is collecting data on billions of meetings, do my meetings really make that much difference in their machine learning models?

No. And Yes. If (as has happened) a bank accidentally charges 100,000 accounts an incorrect $10 fee, does that matter? $10 is unlikely to bankrupt anyone. But the bank just walked away with a million dollars. I think we would all call that theft.

AI companies are doing the same thing now, only with expertise rather than money.

How this affects you.

Legal effects. If you’re a doctor, trainer, consultant, therapist, lawyer, or anyone who delivers your product or service via Zoom, this means that your private conversations may be used to train a machine learning model.

Depending on your profession, there may be legal implications for you if this happens.

Ethical effects. If Zoom then releases that machine learning model in some form (or even just uses it internally), that model might produce output that is similar to the conversations you’ve had. It may use slightly different words, or omit proper names, but it may summarize your conversations or convey the gist of them. Depending on the summary, it might give enough hints that a reader could deduce the actual details.

Competitive effects. If you make your money from your advice giving, the model that Zoom builds might be used, as Adobe’s was, to produce a product that directly competes with you in the marketplace. Why hire an interior decorator when Zoom will let you pay $50 to work with an AI that’s been trained on a few hundred thousand conversations that real interior decorators had with their clients.

What to do next.

If you think there may be legal implications with your conversations being recorded by Zoom, check with your lawyer. Point them to sections 10,2, 10,3, and 10,4 of the Terms of Service. Also, the privacy policy.

If you’re concerned about your conversations being used to put you out of business, stop using Zoom and refuse to deliver your services over anyone else’s Zoom account (they may have given consent for their account to be used for training data).

Be vigilant. These clauses are becoming more and more common with cloud services. When you use any new high tech product, search “Terms of Service” pages for the phrases “Machine Learning” and “AI” and “artificial intelligence” and see what rights you’re giving up to your own work product.

(Cars are now a high-tech product, by the way. Pay particular attention to whether the car company can monitor and record everything you do and say inside your car. Some car companies have you grant that right as a condition of buying the car.)

Stay safe out there. Because now, it’s your very own productivity tools that are trying to take you down.

How to Live Your Values (no, you don’t really care)

Business, communication, culture, Psychology

“Hello, valued customer, your call is very important to us. Now please wait 15 minutes because we don’t want to spend the money to staff our phone lines.”

There was an actual human being who decided to record that message. That actual human being may really have believed that they valued customers. I fervently hope I’m not that person.

Your are your values

Values are an interesting thing. We all have them. They drive our behavior. They determine who we hang out with. They determine our decisions. And when we’re giving our TED talk, we even talk about our values. We list them. We point to their worldly goodness. “Family is what matters most.” Everyone nods. We think we live our values.

Except.

The values we proclaim—the ones in our TED talk—may have no relationship to the values we live by. Most of us assume that our lived values correspond to our proclaimed values. Most of us are wrong.

This matters because our lived values are the ones people will judge us by. They’re the values that will determine our reputation and “personal brand.” Those, in turn, will determine who wants to do business with us, who wants to hang out with us, and much of the quality of our emotional lives. The continual neglect of our teenagers’ science fair competitions are what they remember, not the world “family matters most.”

This also matters because presumably we actually want to be living our espoused values! What if we talk about integrity, and really want to be surrounded by people with integrity? What if we talk about respect, and really want to respect people and be respected by them? How can we make this happen?

Know What You Value (and thus, Who You Really Are)

First, list your proclaimed values. This will be easy, because they’re the ones you proclaim. Simply answer the question “what do you value?” off the top of your head. You’ll get the list. Watch your TED talk. You did a great job of listing them there. “I value truth, constructive disagreement, and following through on promises.”

Next, identify where those values drive your behavior. For each of your values, think about the kinds of decisions and tradeoffs where those values would show up. If you value truth, where would that manifest? Perhaps in giving feedback when someone asks if they’ve done a good job. Or when they ask if their current outfit is flattering.

If you value constructive disagreement, that would manifest in conversations with your spouse where you have differing opinions about something important. When it comes to following through on promises, you would look at things you’ve promised, and when (or if) you delivered on those promises.

Lastly, take a hard look at your lived values. Go through the scenarios you identified and notice what you actually did in those situations. Did you give honest feedback, or did you say the easy thing that wouldn’t rock the boat? Did you cave in to your spouse, because it was easier than asserting your own opinion. Do you have excuses at the ready, to show why it was actually reasonable to break all those promises?

This is very hard, because you will find that your lived values don’t match up perfectly to your proclaimed values. Indeed, some people may find that their lived values are the opposite of their proclaimed values. It is far more comforting to live in ignorance, than face the reality that the person who most betrays your values is you.

Now Change: Start Living Your Values

Once you know where the gaps are, you know where to change your behavior. Next time you’re in the situations you identified, consciously behave according to your proclaimed values, instead of your lived values.

This will feel wrong and unnatural! You’ve spent your lifetime deciding to reduce staffing in a call center so you boost profits. Now, you’re making a decision to spend more money to provide better customer service. If that decision felt natural, you would already behave that way. Expect yourself to resist, push back, and generally try to maintain the status quo.

It’s helpful to enlist trusted friends and colleagues in helping me change. You can ask your teenagers, “I want to do a better job of putting family Please tell me when I’m falling down.” They’re teenagers. They’ll tell you. You can ask your work colleagues, “I want to do a better job of living our values of customers-first. Please help me make decisions that reflect that.” You’ll be surprised. If you are sincere in your request, and you act on their feedback, people will be happy to help.

Values are the core of our identity. Our proclaimed values represent the ideal we wish to be. Our lived values represent the person we are. By bringing the two together, you’ll be taking control of both who you genuinely develop to be, and others will come to see you as that same (hopefully awesome) person.

What is market size?

entrepreneurship, strategy

I’m a judge for Mass Challenge, as well as the Harvard Business School competition, and I’ve noticed that many entrepreneurs don’t know what market size means. Let me call out two of the most common mistakes, which can be the difference between recognizing a real opportunity and fooling yourself into believing something is an opportunity when it isn’t.

When a potential investor (including you, investing your time and career!) asks the size of your market, they’re asking how much money is out there (or how many customers) that could conceivable be spent on your company.

Market Size Isn’t Demographics

“The market for our new deodorant is anyone over the age of 12.” Actually, it isn’t. That’s way too general. Your market is defined at least in part by who you can reach. Your accessible market is what matters. You can’t reach everyone over the age of 12. “The market for our new deodorant is teenage girls between 14 and 18.” That is a much more realistic assessment and probably much more reachable through advertising in an identifiable set of magazines, TV ad spots, etc.

Market Size Isn’t Your Customer’s Revenues

The other big mistake entrepreneurs make is giving the market size as the total market revenues of all possible customers. “We sell hand sanitizers to media companies. Combined media revenues were $100 billion last year.” That’s a slippery evasion, because no media company will spend all their income on hand sanitizers. The market is not total revenues of all possible customers, but total amount all possible customers are likely to spend on your product. “Media companies spent $100 million on hand sanitizer last year, so that’s our market size.”

Market Size is the Potential Revenues You Can Reach

“The market for our internet-enabled back scratchers is middle-age men who feel the need for meaning in their lives. There are 50 million of them in my country, and at $19.95 (+ shipping and handling) that’s a billion dollar market.” Yes, except there’s no way to reach all 50 million of those customers. If there were a mailing list of all 50 million, you could do it. And you can certainly try your best to cover every possible advertising and media outlet that reaches middle-age men. But at the end of the day, only people you can reach with your message are potential customers.

An acquaintance of mine is developing a product for online gamers who make a living by livestreaming their games. That’s an addressable market, because there are forums, awards, conventions, podcasts, and an entire media ecosystem that pretty much every live streamer follows.

To put it all together:

When you’re evaluating the potential of an opportunity, be careful to ask how much money could reasonably come your way from the customers you’re explicitly able to reach. That is a much better number to use for market size.

LinkedIn etiquette: If you must cold call (don’t), at least do it well.

Business, Technology

LinkedIn is an amazing resource! Use it to find people who are selling what you want. Use it to offer or find jobs. But don’t use it for outbound sales.

It’s been open season for people spamming my inbox with unsolicited sales pitches. While I’m sometimes open to sales pitches, not on LinkedIn. It’s a platform where we go to showcase ourselves to anyone interested in what we have to offer. No one goes there to be sold to; everyone goes there to sell.

This is a really great system! If someone wants an executive coach, they search for “executive coach.” Then they reach out. Everyone wins: the customer finds a coach, and the coach deals only with prospects who are already a good match.

Outbound cold emails ruin all that. People reach out with a generic form-letter pitch. “Hi! Buy my product.” The worst thing about these form letters is that they’re so obviously form letters. I’ve even had people ask what I do. What I do? WHAT I DO? Other than pages of description, links to videos, a website with 400 articles on it, and two books, that question betrays the person as a rank amateur.

Think about it. This is LinkedIn! There are pages of information right there. All it takes is a single click, then some reading. And they choose to send a one-size-fits-all form letter. The message is loud and clear: “I don’t bother to put a modicum of thought into my approach.” If they can’t be bothered to read your profile before spamming you, what does that say about the kind of work they’re likely to do?

If that’s you, and you use LinkedIn for outbound marketing (please don’t), customize your pitch. Not by inserting some cut-and-pasted text (“I read your article [ARTICLE_TITLE] today”). Read your prospect’s profile. Read anything they’ve written. Then think. Then, and only then, write:

I read your article “What Koalas Can Teach Us About Community.” Your Eucalyptus-leaf-Like-button insight was brilliant!

… Now when you segue into your pitch, you can make it personal, so in the event they are open to inbound sales, at the very least you’ll stand out from the crowd.

If you don’t use LinkedIn for outbound marketing (good for you!), but you’re on the receiving end of those who do…

Feel free to steal this canned response

Hi,

LinkedIn is primarily a platform for people to inform the world about what they do, so they can accept inbound inquiries. People also use it to list and answer job ads. But no one comes here to be marketed to.

If you are interested in hiring me or my services, let’s set up a time to talk. If, however, you want to pitch me your services in a form-letter cold call, I’m the wrong person for you.

By the way, a word of free coaching: on LinkedIn, you can find out a tremendous amount about someone with a single click. That means letters make you look *especially* bad. A form letter screams “I don’t bother to do my homework.” That’s not a good look, especially if you want someone to hire you.

If you’re going to pitch someone (please don’t) on LinkedIn, five minutes of homework and a minute of customization, will give you a much better chance of coming across in a way that would engender a real response.

I hope you enjoyed this automated response. It attempted to give a clear answer and an example of the kind of coaching advice I give. It’s a sign of the times that this particular coaching advice is so widely needed that a form letter works, but … there you have it.

Enjoy!

Update: In a hilarious bout of complete hypocrisy, I might start doing some mass outreach on LinkedIn. Given COVID levels, I’m still not comfortable going to indoor conferences, which makes it very difficult to do propecting.

The Business of a Magician

Business, CEO, entrepreneurship, strategy

All businesses share the same underlying foundation: a flow of money in and out. The money in has to cover the costs of the money out. It has to pay for the production of your product or service, and have enough left over to fund growth and expansion for the future. This is the basic equation whether you’re Amazon or General Electric or Tesla. Some businesses aren’t profitable (Tesla, as of when I’m writing this), but they still get money in. Their money comes from investors, in the form of loans or equity investment.

Some simple back-of-the-envelope calculations can help you understand a business. It’s most obvious in a small business. Say, a one-man business. Magician Evan Northrup and I sat down to talk about his business and how it works. He graciously allowed me to share the video. In the first half, we walk through the basic numbers of the business. In the second half, we ask how to make his product stand out from his competition.

What do CEOs do? A CEO Job Description

Business, CEO, communication, culture, entrepreneurship, Featured, leadership, strategy

The Chief Executive Officer is one of the most coveted titles, and least understood jobs in a company. Everyone believes that CEOs can do whatever they want, are all powerful, and are magically competent. Nothing could be further from the truth. By its very nature, the job description of a CEO means meeting the needs of employees, customers, investors, communities, and the law. Some of a CEO’s job can be delegated. But several elements of the job must be done by the CEO. Read on for the details of what makes a CEO.

What is intrinsic to the CEO’s job?

This isn’t a traditional job description; it’s an examination of the actual roles that a CEO plays (legally or de facto) within a company. A CEO’s job description includes a few important areas. Any individual CEO may take on any tasks that they wish, but these are the things that can’t be delegated:

Setting strategy and direction
Modeling and setting the company’s culture, values, and behavior
Building and leading the senior executive team
Allocating capital to the company’s priorities

While a CEO may get input for some of those duties, it is the CEO’s—and only the CEO’s—responsibility to perform those well. Being the CEO, they can spend the rest of their time doing whatever they decide they want to spend their time on. But ultimately, everything else about a given CEO’s job is optional.

Success as a CEO requires more than just knowing the CEO’s job description. A CEO needs to know how to measure their success as a CEO, avoid the pitfalls that are unique to the CEO’s job, and conduct themselves to stay sane and skillful over time.

A CEO Job Description, Part 1

Admit it. We all feel a touch of awe when someone has it: the CEO title. The power, the salary, and the chance to Be The Boss. It’s worthy of awe!

Too bad so few CEOs are good at what they do. In fact, only 1 in 20 are in the top 5%[1]. Many don’t know what their job should be, and few of those can pull it off well. The job is simple—very simple. But it’s not easy at all. What is a CEO’s job?

More than with any other job, the responsibilities of a CEO diverge from the duties and the measurement.

A CEO’s responsibilities: everything, especially in a startup. The CEO is responsible for the success or failure of the company. Operations, marketing, strategy, financing, creation of company culture, human resources, hiring, firing, compliance with safety regulations, sales, PR, etc.—it all falls on the CEO’s shoulders. Being responsible means that the CEO is the one held accountable for the success of the company’s efforts, across the board. But of course, the CEO doesn’t actually do all that work.

The CEO’s duties are what she actually does, the responsibilities she doesn’t delegate. Some things can’t be delegated. Creating culture, modeling values, building the senior management team, financing road shows, ultimate approval of how money gets spent, and, indeed, the delegation itself can be done only by the CEO.

Many start-up CEOs think fund-raising is their most important duty. I disagree. Fund-raising is necessary, but the CEOs contribution is in building a superb business with the money raised.

Setting strategy and direction

What is the CEO’s main duty? Setting strategy and vision.The senior management team can help develop strategy. Investors can approve a business plan. The Board can approve, advise, or ask the CEO to revise a business strategy. But at the end of the day, it’s the CEO who ultimately sets the direction:

Which markets will the company enter? Against which competitors?
What will the company’s product lines be?
How will the company differentiate itself? Will it be low cost? High service? Convenient Locations? Flexible financing? High-touch? Mass produced?

The CEO decides, sets budgets, forms partnerships, sells off incompatible product lines, makes acquisitions, and hires a team to steer the company accordingly.

Modeling and setting the company’s culture, values, and behavior

The CEO’s second duty is building culture. Work gets done through people, and people are profoundly affected by culture. A lousy place to work can drive away high performers. After all, they have their pick of places to work. And a great place to work can attract and retain the very best.

Culture is built in dozens of ways, and the CEO sets the tone. Her every action—or inaction—sends cultural messages (see “Life Under a Magnifying Glass”). Clothes send signals about how formal the workplace is. Who she talks to signals who is and isn’t important. How she treats mistakes (feedback or failure?) sends signals about risk-taking. Who she fires, what she puts up with, and what she rewards shape the culture powerfully.

This can not be emphasized enough! People imitate a CEO’s behavior when deciding how to act. The book Pre-suasion by Robert Cialdini, documents at length the ways in which, for example, a dishonest CEO makes employees feel as if they can cut corners, steal from the company, and generally behave according to those same standards.

A project team worked weekends launching a multimedia web site on a tight deadline. Their CEO was on holiday when the site launched. She didn’t call to congratulate the team. To her, it was a matter of keeping her personal life sacred. To the team, it was a message that her personal life was more important than the weekends and evenings they had put in to meet the deadline. Next time, they may not work quite so hard. The emotion and effect on the culture was real, even if it wasn’t what the CEO intended. Congratulations from the CEO on a job well done can motivate a team like nothing else. Silence can demotivate just as quickly.

If vision is where the company is going, values tell how the company gets there.Values outline acceptable behavior. The CEO conveys values through actions and reactions to others. Slipping a ship schedule to meet quality levels sends a message of valuing quality. Not over-celebrating a team’s heroic recovery when they could have avoided a problem altogether sends a message about prevention versus damage control. People take their cues about interpersonal values—trust, honesty, openness—from CEO’s actions as well.

Building and leading the senior executive team

Team-building is the CEO’s #3 duty. The CEO hires, fires, and leads the senior management team. They, in turn, hire, fire, and lead the rest of the organization.

The CEO must be able to hire and fire non-performers. She must resolve differences between senior team members, and keep them working together in a common direction. She sets direction by communicating the strategy and vision of where the company is going. Strategy sets the direction for the senior team, who in turn set it for the rest of the company. With clear direction that everyone understands, the team can rally together and make it happen.

Don’t underestimate the power of setting direction. In 1991, at Intuit’s new employee orientation, CEO Scott Cook presented his vision of Intuit as the center of computerized personal finance. Intuit had just 120 employees and one product. Ten years later, it’s a billion-dollar company with thousands of employees and dozens of products. Worldwide, it is the winner in personal finance, bar none. The success is due in no small part to every Intuit employee knowing and sharing the company’s vision and strategy.

Allocating capital to the company’s priorities

Capital allocation is the CEO’s #4 duty. The CEO sets budgets within the firm. She funds projects which support the strategy, and ramps down projects which lose money or don’t support the strategy. She considers carefully the company’s major expenditures, and manages the firm’s capital. If the company can’t use each dollar raised from investors to produce at least $1 of shareholder value, she decides when to return money to the investors. Some CEOs don’t consider themselves financial people, but at the end of the day, it is their decisions that determine the company’s financial fate.

Footnotes for Part 1

[1] Pay no attention to the math background peeking from behind the curtain… back

Measuring Success as a CEO.

Knowing the job description is a good first step for a CEO, but to know how she’s doing, she needs to design her own measurement system.

Unlike inconvenient lower-level jobs, no one tells the Chief Executive how she’s doing. Do managers let her know she’s undermining their authority, making poor decisions, or communicating poorly? Not likely. Even when a CEO asks for honest feedback, the fear is there: non-flattering feedback may stall a promising career[1]. Even when a company uses 360-degree feedback, no one penalizes the CEO if she doesn’t act on the feedback.

The Board of Directors supposedly oversees the CEO, but they are far removed from day-to-day actions. Over time, they can evaluate performance, but they look mainly at share price and company strategy. They are rarely interested in—(or qualified to comment on!)—the CEO’s daily behavior.

But the CEO’s daily behavior will make or break the company! The CEO’s duties don’t change because they are unmeasured. Indeed, lax measurement makes it easy for the CEO to feel confident, even when she shouldn’t. Good feedback is the only way to know what’s working, but share price simply doesn’t do it. External measures measure the company, not the link between the CEO’s actions. A low share price tells her something’s wrong, but it doesn’t help her figure out what.

By measuring her performance based on her duties, a CEO can learn to do her job better. As explained in part 1, the CEO’s job is setting strategy and vision, building culture, leading the senior team, and allocating capital. The last of these is easy to measure. The first three are more of a challenge.

How does a CEO know she’s doing the vision thing? It’s hard. Having vision isn’t enough—that just takes a handful of mushrooms and a vision quest. Communicating the vision is the key. When people “get it,” they know how their daily job supports the vision. If they can’t link their job to the vision, that tells a CEO that her communication is faulty, or she hasn’t helped her managers turn the vision into actual tasks. Either way, a CEO can monitor her success as a visionary by questioning and listening for employees to link their jobs with the company vision.

Culture building is subtle, the culture a CEO sees may be very different from the culture of the rank-and-file. One company had a facilities policy that all equipment within 450 feet of the senior management offices was kept in top working order. Senior managers saw a smoothly running company, while everyone else saw neglect and carelessness.

Surveys about openness, values, and morale can be used to develop a measure of culture. The questions to ask aren’t rocket science. The book First, Break all the Rules gives a great questionnaire for measuring overall culture. Also, check turnover. When 95% of your workforce says they can’t wait to get to work, something is going right. If people rarely leave, and if it’s easy to attract top talent at below-market prices, you can be sure the culture plays a large role. If people leave (especially your top performers), again—look to culture. And don’t underestimate the power of walking around and counting smiles. If people are having fun, it will show.

The CEO’s success at team-building can often be measured through the team. Teams usually know when they’re effective. They can also rate their team using assessments that measure specific behaviors. For example, “I can trust my teammates.” “My teammates deliver their part of the project on time.” “Every member knows what is expected of them.” Regular team self-assessments can help the CEO track the team’s progress and hone her abilities to keep the team running smoothly[2].

Easiest to measure is a CEO’s capital allocation skill. In fact, financial measures are the ones made public: earnings and share price. But how can a CEO link those to her actual decisions? Working with her CFO, a CEO can devise financial measures appropriate to her business. Sometimes traditional measures are most appropriate, such as economic value added or return on assets (for a capital-intensive company). Other times, the CEO may want to invent business-specific measures, such as return on training dollars, for a company which values state-of-the-art training for employees. By monitoring several such measures, a CEO learns to link her budget decisions with company outcomes. Ultimately, the CEO’s should be creating more than a dollar of value for every dollar invested in the company. Otherwise, her best bet is to return cash to the shareholders for them to invest in more productive vehicles.

In startups, earnings begin low to nonexistent, and share price is more about salesmanship and vision than earnings. So the CEO gets almost no useful feedback about her capital allocation wisdom. She doesn’t know whether a dollar spent on a slightly nicer-than-necessary copy machine is wasted or is a wise investment in a long-term. Careful attention to the design and tracking of financial measures can help her prepare for the transition to an earnings-driven company.

In his 1988 Annual Report, Berkshire Hathaway chairman Warren Buffett included an excellent essay on CEO accountability. Click here to read Mr. Buffett’s observations on CEO measurement.

Footnotes for Part 2

[1] The CEOs don’t help the problem. Many of my CEO clients highlight the value of honest feedback from their coach. Yet they complain about employees who disagree with them, just don’t “get it” or don’t have enough information “to understand the real issues.” In a coaching call, they can hear feedback and consider it. At work, they treat disagreement as dissension, and then wonder why everyone’s a “Yes man.” back

[2] There are dozens of team effectiveness surveys. You can start by checking out http://www.cambriaconsulting.com, http://www.ccl.org, and http://www.pfeiffer.com. back

Pitfalls and Solutions for the CEO

A CEO can tank a company by not understanding their duties, or failing to set up good measurement systems. But it’s also true that the job itself can screw up the person, as well. It’s said that power corrupts, and few positions are more powerful than CEO. While the USA may be a democracy, our companies are legal dictatorships with the CEO calling the shots(1). While she may be having a great time playing Boss, the position may be taking a very human toll.

It’s all too easy for the CEO to become a …; jerk(2) …; without realizing it. They can forget—if they ever knew—what it was like to have a boss. They are free to ignore feedback that they don’t want to hear, and no one will call them to task for it. They can bypass the chain of command when they want to meddle. They can give themselves raises and genuinely believe they deserve it. And most dreadfully, they can forget what it is like to be “one of the little people”:

worker	I have to leave early today.
CEO	Why?
worker	To pick up my kids from daycare.
CEO	Oh… (looks genuinely perplexed) Why don’t you have your nanny do that?
worker	I don’t have a nanny.
CEO	Oh…; wanders away with a mildly confused expression

The worker was an incredibly productive person. She worked harder than the CEO, got more done, yet couldn’t have afforded a nanny if her life depended on it. The CEO didn’t intend to be a jerk, but his lack of empathy didn’t win many supporters.

A CEO can become arrogant by externalizing blame

Having no day-to-day accountability for her actions can also turn a CEO sour. When things go wrong, she can blame everyone around her without facing her own shortcomings. “My employees just don’t get it,” proclaims the CEO, never thinking for a moment that she is the one who hired them. Did she hire incompetents? Or has she failed to communicate goals consistently and clearly? “Market conditions have changed.” she declares. A nice excuse, but isn’t it the CEO’s job to anticipate the market and position the company for success under a variety of scenarios? Without someone to keep her honest, she can gradually absolve herself of all responsibility.

Believing in a title can lead to overconfidence

Arrogance also threatens a CEO. “Because I am CEO, I must know the business better than anyone else.” It has been said, but it just isn’t true. No CEO can be an expert in all functional areas. A CEO who is doing her job is spending time with the big picture. If she knows the details better than her employees, she’s either hiring the wrong people or spending her time at the wrong levels of the organization. It’s appropriate for a CEO to manage operations if absolutely necessary, but she should quickly hire good operational managers and return to leading the whole business.

If she also comes to believe that the CEO title grants infallibility, watch out. Even the Pope is only infallible a couple of times each century. But CEOs can reinforce their delusions of grandeur by giving themselves higher salaries (surely she deserves it! After all, salary benchmarks show how underpaid she is) and more perks. Then when layoffs come, the CEO wants applause for having the moral strength to make “hard choices,” quietly overlooking how her own poor decision making led to the need for layoffs.

CEOs can stop learning well

Of course, once infallible, there’s no more to learn, and a CEO may quietly stop learning. Without daily oversight and high quality feedback on how she does her job, she can mistakenly believe her actions lead to success. In reality, she may be doing the wrong thing, but her staff may be working around the clock to cover for her.

Furthermore, sins of omission aren’t penalized. A CEO who does an adequate job, but far less than she could/should have done—goes unnoticed. In hindsight, XYZ Software(3) could have had a $1 billion market niche, and gone public with a valuation of tens of billions. Instead, it stuck to one product, had little understanding of its markets, and ignored competition. Yet it still went public in a $300-million IPO. Was management penalized for a lack of vision and market responsiveness? Hardly! The top managers walked off with $60 million apiece, reinforcing the notion that they had done a great job. Yet with a slightly grander vision, the company might have been 10 or 100 times its size.

Setting vision is the CEO’s job, but nothing tells her if her sights are too low. She isn’t penalized for missing the grander vision. Such sins of omissions are a CEO’s worst enemy. She can be lulled into mediocrity by not knowing what would have been possible. The four-minute mile was considered impossible…until Roger Bannister ran it. Now, it’s commonplace. Likewise, a CEO may limit herself by not realizing she can do her job better.

Though salary benchmarks are common, performance benchmarks are surprisingly rare. Quality learning demands a CEO benchmark herself against other superb CEO’s. Her central learning question is not “are you doing a good job?” but “are other CEOs doing a better job and if so, how can you learn to measure up?(4)“

Footnotes for part 3

(1) Ok, ok. Technically the Board of Directors has hire/fire authority over the CEO, but the Board can’t control day-to-day operations. And while there are certainly boards that replace inept CEOs, it takes sustained incompetence over a long time to move a board to action. So for practical purposes, the buck stops with the CEO. back

(2) Her employees may use less diplomatic terms. back

(3) Names are changed to protect the innocent. back

(4) An excellent book on management best practices is “First, Break All the Rules” available by clicking here to go to the books page. back

Coaching tips to stay sane and skillful at the top of the heap.

These coaching assignments will help an executive avoid some of the pitfalls of the CEO job. They are simple, easy, and won’t take much time. They’ll help a CEO stay connected with workers, keep herself humble, and increase her learning while becoming more successful. The suggestions strive to be quick and easy to do, while still producing real results.

Make Space to Practice These Assignments

Set aside 5 to 10 minutes, daily, to developing as a leader and human being. This will be the time you think about the below topics and set your mind for the day. Schedule the time if necessary. Just make sure that you do what’s right for your growth.

Pace yourself. Life is long. Adopt these suggestions one or two at a time, and practice until you make them your own. Then move on. Forcing won’t help; this is about developing at your own natural rhythm. Do one assignment for a few weeks, then move on to another. Keep the ones that work for you and drop those that don’t.

Staying connected with “the little people”

Cultivate an attitude of respect—your respect for them. The “little people” are the ones turning your vision into reality. Meditate on this for a few minutes and ask yourself whether you can their jobs as well as they can. If you can, then you’re not hiring the right people—go change that! Otherwise, once a day, go talk to one of your low-level employees—someone more capable than you in their area of expertise—and learn from them. Choose a different person each day. Get as close to the front line workers as possible.

Listen with an open mind and learn. Learn about their job. Ask what works for them and what doesn’t. Above all, listen to their comments without judgment. Your goal is to connect with their experience of the world, not impose your own. Learn about their life. Find out what motivates them. Why did they come work for you instead of somewhere else? Simply by spending a few minutes understanding their life, you can greatly increase your appreciation of how they’re different (and similar!).

Share your vision and job with them, from a position of service. Pretend that your job is to make this person a success. Ask them how their job fits into the work the company does. If they don’t know, take on the responsibility of helping them understand how their job links to the vision. Clarify any confusion they may have about where the company is going. And ask them what you can do to help them succeed at doing their best. Then do it.

Staying humble

Acknowledge, often! Without your employees, your dreams and plans wouldn’t amount to much. Take every available opportunity to acknowledge the contribution of those around you and give them credit, especially in public. Feedback is rare in most companies, and positive feedback is rarest of all(1).

“Get” that it’s all your responsibility. When things don’t go the way you want, take responsibility—whether or not it’s your fault. The mindset of responsibility will put you in a much more powerful place than the mindset of blame. Regularly review circumstances asking, “What could I do differently (or stop doing) to make a positive difference?” Identify the action and then take it. You’ll be surprised how much more power you have over externalities, operating from responsibility rather than blame.

Gather honest advisors to hold you accountable for your behavior. Sometimes a Board of Directors will give honest feedback, but they are removed from your day-to-day behavior. Actively solicit feedback from third parties: friends, peers, associates. Share your issues and how you’re handling them, and ask for an honest assessment. Everyone in a company is accountable to someone for their behavior, except the CEO. Make yourself accountable as best you can.

Identify your limits. Ask, “can someone else in the world do my job better than I am currently doing it?” If the answer is Yes, seek out that person and ask for their guidance in getting better. If the answer is No, validate that answer by asking your advisors, competitors, suppliers, customers, and employees. Many companies have crashed and burn because they believe they were the best, for no good reason but pride and ego.

Create measurable performance criteria for your executive team, including yourself. Make sure people within the organization know your goals, and know what you can be counted on to do. Hold yourselves accountable. If you don’t meet your goals, withhold your bonus, take no raise, and treat yourself exactly as you would treat an employee who missed their targets. It sends a powerful message to the company that you’re serious about performance.

Ask your direct reports, your Board of Directors, and anyone else you work with for feedback a couple of times a year. You can use a 360-degree feedback process or simply ask in an e-mail. It’s a lot easier to hear feedback on your performance if you’ve explicitly asked for it.

Videotape yourself receiving bad news. Watch the videotape and decide whether or not you would want to work for that person. If the answer is No, learn to chill when you hear bad news.

Learning well

Study excellent CEOs. Call a CEO you admire and invite them to lunch. Exchange tips and adopt tactics that others have found useful. Read books like First, Break All the Rules, which are broad-based studies of habits of top-performers. Adopt at least one new habit a month.

Create systems for gathering feedback. Interview customers, competitors, analysts, and others in your industry to know how your company and products are perceived. Make sure you’re gathering feedback that will disconfirm your beliefs about the world, as much as confirms it. For example, if you think you’re #1 in your market, don’t just ask customers why they like your products. Ask what other products they use, and how your products fall short.

Spend time learning about the fundamentals of a CEO’s job:

Setting strategy. The strategy and vision for the company determine where everyone will focus their efforts. Find a vision and strategy and use it to align your entire company.
Creating the corporate culture. Your culture will determine what people do and don’t try, who will stay, who will leave, and how business will get done. Culture starts with you. Decide how you want people to act and start modeling the behavior publicly.
Capital allocation. Every dollar you raise and spend should produce more than $1 of return for the company, or it’s a waste of money. Learn how to make these judgements.
Hiring and Firing. The job of executives is primarily team and culture building. Hiring and firing are must-have skills. Read, take classes, and review past hiring successes and mistakes. Do whatever you can to hone your abilities.

Raise the Bar

Hold yourself to higher standards next year than you did this year. Challenge yourself to learn to get more done with fewer hours and fewer resources while creating a more balanced life for yourself.

These are just a few of the things you can do to increase your chances for success as a senior executive. I also believe in working with a coach to identify and overcome (or compensate for) blocks in your performance. Success can be had with many different skill sets. The more you learn about yourself and your capabilities, the better you will be able to shape a job that works for you. The more you learn about the capabilities of those around you, the better you will be able to build teams that produce spectacular results.

Do Great Things!

Footnotes for Part 4

(1) Social psychology has shown that rewarding desired behavior is far more effective than punishing bad behavior or non-performance. For reasons that aren’t entirely clear, our culture has evolved around using punishment as the main way of controlling behavior. Unfortunately, punishment doesn’t work very well. Interestingly, animal trainers have known this for years. For an excellent book on the subject, check out Don’t Shoot the Dog by Karen Pryor. back

Business

Here are articles on Business

In the Beginning

Just the Math, Ma’am

The Synergy is Real

But Synergy Makes Everything Worse

Here’s How to Think About It

Your are your values

Know What You Value (and thus, Who You Really Are)

Now Change: Start Living Your Values

Market Size Isn’t Demographics

Market Size Isn’t Your Customer’s Revenues

Market Size is the Potential Revenues You Can Reach

Feel free to steal this canned response

What is intrinsic to the CEO’s job?

A CEO Job Description, Part 1

Setting strategy and direction

Modeling and setting the company’s culture, values, and behavior

Building and leading the senior executive team

Allocating capital to the company’s priorities

Footnotes for Part 1

Measuring Success as a CEO.

Footnotes for Part 2

Pitfalls and Solutions for the CEO

A CEO can become arrogant by externalizing blame

Believing in a title can lead to overconfidence

CEOs can stop learning well

Footnotes for part 3

Coaching tips to stay sane and skillful at the top of the heap.

Make Space to Practice These Assignments

Staying connected with “the little people”

Staying humble

Learning well

Raise the Bar

Do Great Things!

Footnotes for Part 4

Further Reading

Scale requires different people.

Scale requires uniform processes.

Scale requires explicit process.

GE was just booted from the DJIA

What is “the economy?”