Agile Organizations shift from a focus on short-term profits towards a focus on customer delight and achieving a shared purpose.
This issue is the first in a series where we will explore each of the Principles of Agile Organizations in more depth.
Principle: From Shareholder Value to Customer Delight and Shared Purpose.
A primary focus on shareholder value (profit) consistently leads to short-term thinking, sub-optimization, and low engagement. Agile Organizations clearly define their customer(s) and focus on delighting them by continually delivering value. Agile Organizations do not view profit as a goal, but as the means to continue to deliver on the organization’s purpose. Profits are the natural result of adding value and delighting customers.
Order of Operations Matters
In mathematics, the Commutative property states that the order of the parts of an expression can be switched, and the resulting expression is equivalent to the original expression, for example, a + b = b + a. Addition and multiplication are commutative. Subtraction and Division are Non-Commutative: 5-2 ≠ 2-5, and 6/3 ≠3/6. This first Principle of Agile Organizations is non–commutative.
A focus on Achieving a Shared Purpose and Delighting Customers tends to result in Maximizing Shareholder Value, especially over the long term. As we make progress on achieving a shared purpose, we improve the lives, even in some small way, of those whom the purpose serves. As we delight customers, they are happy to pay for the value we add. These things lead to maximizing shareholder value over time.
The reverse is not true: a focus on Maximizing Shareholder Value does not naturally lead to Delighting Customers and achieving a Shared Purpose. Instead, it tends to lead to the opposite result. The focus on hitting predicted revenue targets, with a goal of impressing Wall Street or other investors leads to a collection of dysfunctions. A few common examples:
- Sacrificing quality to meet a predicted release date
- Under-investing to show a stronger bottom line, when investing would have a better long-term outcome
- Cutting prices to meet sales quotas
Organizations build incentives into the system that amplify all of these behaviors. Executive compensation packages are tightly coupled to stock price. Employee bonus plans are based on quarterly individual, team, and organizational targets. It is no wonder this happens. It is a natural result of most corporate structures, which legally bind officers of the company to Maximize Shareholder Value, which is usually interpreted as “make the stock price go up, every quarter”. Steve Denning describes the problem nicely in his Forbes Article “The Dumbest Idea In The World: Maximizing Shareholder Value”. Quick Summary: Maximizing Shareholder Value leads to short-termism, which slowly sucks the life out of an organization. Disillusioned employees and customers do not make a healthy organization.
A Better Way
Agile Organizations flip the equation. They recognize that delighting customers and working towards a shared organizational purpose have multiple benefits. First, these help us focus on the long term. Second, they lead to higher employee engagement, amplifying Play, Purpose, and Potential from McGregor and Doshi’s excellent “Primed to Perform“. Long-term focus and high engagement, along with delighting customers, are the surest recipe for a thriving business. Agile Organizations understand that this focus is non-commutative, and ensure they are focusing on the correct side of the equation.
Tony Hsieh, CEO of Zappos, gives a great example of this principle in his book: Delivering Happiness. Hsieh had boasted to his friend about the great customer service that Zappos provides. The friend decided to put the company to a test, and called Zappos to order a pepperoni pizza (Hsieh said he was hesitant about putting this story in the book for obvious reasons). The Zappos employee explained that the man had reached a shoe store, but she took down some information from the man and put him on hold. When she came back on the line, she explained that she found a pizza place near his hotel and ordered the pizza for him. In fact, she ordered it using her personal credit card. The friend was shocked and became a loyal Zappos customer on the spot.
The full title of Hsieh’s book is Delivering Happiness: A Path to Profits, Passion, and Purpose. Notice that profits are part of the equation, but are on the correct side – after delivering happiness.
Putting the Principle to Work
As with all complex problems, there is no blueprint to this principle. Instead, we must take an approach of experimenting to learn. A few experiments an organization might try related to this principle are:
- Change a profit focused target or incentive to an incentive around customer delight or purpose
- Measure and improve employee engagement – it is a leading indicator of a strong connection to customers and purpose.
- Give front-line employees and teams direct access to customers and autonomy to solve their problems