I once consulted to a very large oil company. It determined the exploration department’s success by counting how many wells they drilled each year. After 5 years, they had more new wells operating than any of their competitors. Success!
A problem surfaced, however: their new wells were the least productive of any new wells in the region. It turned out that their exploration crews gave the company exactly what it said it wanted—more new wells, and quickly. This trumped well productivity as the goal. Unfortunately, the company’s cost to drill and operate these low-producing wells ate into profits considerably.
The company needed to distinguish between the number of wells drilled versus the contributions of the wells to the company’s bottom line. In other words, the company had to change its focus from throughputs to outcomes.
All Performance Evaluations (PEs) should start with and focus on contributions to the critical path. In other words, outcomes count the most, with positive ones in the plus column and negative outcomes in the minus column. Just about everything else is window dressing.
Here are some key questions for employees to ask themselves:
Are you earning enough money for the organization to cover your salary and other associated costs?
What is the value that you and/or your talents/expertise/greatness bring to the company?
Why should the company not just eliminate your position or replace you with someone else, especially someone younger, cheaper, offshore, and/or willing to work as a sub-contractor?
If you do not have outcomes to substantiate your value, you are surely at risk of you or your job being eliminated. If, on the other hand, you have substantial, demonstrable outcomes that can be shared with the organization, you should be as concerned as management with getting PE right. While Part Five of this book will focus on the critical-path considerations of individual employees, it’s not hard to see why employees should take an interest in how their bosses handle PE.
As we discussed in the preceding chapter, companies need to stop prioritizing their PE efforts on inputs and throughputs. Instead, they need to establish output and outcome criteria that underscore the primacy of the critical path. For most companies this will require a 180-degree shift in thinking.
In another example, a top Wall Street bank rewarded its corporate and international bankers on the client loans they generated. Their bonuses and salaries skyrocketed when they issued more loans. Their output was phenomenal as they generated loan after loan. The problem, however, came a few years later when those loans soured, and the bank had to take large write-downs. Turns out that the bankers were under-writing risky loans. The desired outcome, i.e., profitability over the life of the loan, went unconsidered in contrast to the output of making the loans (not to mention the bankers’ personal interests in making those loans).
The goal, then, is to connect each and every employee’s activity to the firm's economic value chain. Every organization, whether for-profit or non-profit, has an economic element. The question, then, is how do you connect your performance/contribution to those economics?
Begin my identifying 1 to 3 examples of your performance outcomes that can translate to some economic value for the company. Since most organizations like to "count" things when it comes to performance, list outcomes that can be measured objectively, preferably in dollars. If your performance doesn't have a direct link to the economics, then explain the relationship between what you can measure (this intermediate link) to the company’s economic value.
These examples should achieve the following:
Economically justify your salary/benefits;
Justify why, if the company has a downturn, you should be retained while your colleagues are laid off;
Recognize any increase in your value that would justify you being paid more or getting a bonus.
Consider your effect on key critical path assets both today and tomorrow. Here are the areas where you should be considering your impact:
1) Revenues – As we saw earlier in Chapter 8, in most organizations, revenues rule and revenue generators rule the most. Tying yourself to revenue is a very strong outcome to support your value to the firm. This usually involves getting, satisfying, and retaining customers. Does your work help bring in new customers or increase spending with existing customers? Does your work lead to customers re-purchasing or referring other new customers to you? Are you able to increase the profitability received from your customers?
Another form of revenue generation is producing income from non–critical path assets, like under-utilized patents, that can be licensed to others. For example, DuPont held thousands of unused patents that had been developed in their R&D labs for over 50 years. The company decided not to pursue the technologies related to these patents, so they shuffled them away to the legal department to safeguard them in case they might be useful in the future. For most of those patents, the future never came, and they sat collecting proverbial dust. Then DuPont decided to make a separate income stream by licensing those unused patents to companies that did not compete with them.
A slightly different thing happened in the energy business. It may be hard to believe, but oil and coal companies used to burn off the natural gas that usually spouts out where their main products are found. It took many years before these companies, which were so focused on their main products, realized that if they could capture this natural gas, they could sell it in addition to the oil or coal. In other words, for these companies, the natural gas turned into an alternative income stream.
Some companies create new assets that are not currently on the critical path. A large forestry lumber and milling company employed thousands of employees growing, harvesting, and cutting trees to mill into wood products. Their cut logs and milled products created hundreds of million dollars in revenue. However, their costs were so great that their profit margins were in the 1% to 2% range. Five of their finance professionals realized that the company could make money in the lumber commodity market by arbitraging logs. They would buy logs in the open market from other commodity traders when they thought prices would go up and sell logs before they thought the prices would crater. They were so successful that they made 10X more profit than the entire logging operation—with only 5 people instead of thousands. They created a new business and profit stream for the company by putting their intellectual capital to work in a new way. It is very likely true that these 5 finance folks needed the insights generated by the logging side of the business to be able to trade logs so successfully. Still, no one before them had seen this new possibility, let alone executed it so successfully.
A final path to revenue generation is improving the company’s brands, leading to greater market share or to the flexibility to charge higher prices for the same products. Moving away from the pack to become a “must have” product creates real value for the firm. Apple’s iPod and iPhone were not new products: MP3 players and cell phones had been around for years. But Apple’s improved user interface, along with tying them into the iTunes and iOS system apps ecology, improved the branded experience so much that sales escalated along with Apple’s capacity to premium price.
2) Costs — As mentioned previously in Chapter 7, if you don’t generate sales, then look to driving down costs. How can you increase the productivity of the firm’s human assets, suppliers, capital, physical infrastructure, or technology? Each of these provides an opportunity to increase effectiveness, lower costs, or both. Can you help the company produce more and better products or services at the same or lower costs? Can you streamline important processes so that assets are better utilized? If so, can you create measures that can quantify the value you created?
Driving down costs occurs when you eliminate waste in the system. For example, the U.S. Department of Homeland Security (DHS) constantly adjusts the numbers of Transportation Security Administration (TSA) agents stationed in airports to match the travel demand at various locations. Rather than hire up for the busy season at each airport and then lay off the extra TSAs when it slows down, they will temporarily move TSA agents from airports with slower travel patterns to those with higher demand. So, in summer, the New York/Newark airports need more TSA agents than do the Florida airports. In the winter months it gets reversed. TSA agents are shifted to meet these seasonal ups and downs.
In theory, this may sounds like a good, efficient allocation of system-wide human resources. However, from a critical path cost perspective, it may not be so good. When the TSA relocates an agent from New York to Florida, it racks up considerable travel expenses for housing, meals, and travel. So, this practice can get very expensive quickly. DHS might consider the cost of the kind of seasonal employees that retailers, FedEx, and UPS hire during the holiday season vs. its practice of moving full-time employees around.
An additional problem is that DHS is not as efficient when moving employees around. As one of these relocated TSA agents confided, she knew of an instance when DHS pulled 25 agents from Miami and sent them to La Guardia in the summer. However, Miami became too understaffed. So they pulled 20 agents from the Tampa Airport and sent them to help out Miami. As a result, DHS now had 45 TSA agents spending travel dollars and having their home lives disrupted. Had someone at DHS focused on critical path costs, they would have sent the 20 Tampa TSA agents to New York along with 5 from Miami.
3) Increasing Shareholder Value — Now some people are in the position of being able to increase the market value of the firm in ways other than revenue increases or cost decreases. For example, if you can get certain people to invest in your company, it might drive others to do the same. For example, when Apple shares were sliding in late 2015, Warren Buffet’s firm Berkshire Hathaway started buying, eventually investing $1 billion. This buying activity ended up boosting Apple’s market cap by $18 billion, as others also wanted to follow. If Berkshire Hathaway’s stock purchases resulted from someone inside Apple “selling” Berkshire Hathaway portfolio managers on the stock, then that Apple employee or team deserves credit for helping raise the stock price.
In a similar way, when certain people are hired (or fired) by companies, they might drive the stock price up (or down). In other words, their personal brand carries enough weight to move the market for that company. This is not unlike our earlier example of LeBron James selling out season tickets for the Miami Heat when he moved there, while also increasing the value of the team by $110 million for the owners.
Critical Path Action Items
Can you connect your job outcomes to increasing revenues?
Can you connect your job outcomes to decreasing costs?
Can you connect your job outcomes to increasing shareholder value?
Based on the above, why should the company keep you rather than eliminate your position, outsource it, or replace you with someone cheaper?
Based on the above, should the company pay you even more to keep you?