This article is number two in the series. You can read the first article here.
What is the impact over the long-term of being a leader who optimizes for lasting impact on people and purpose, rather than simply profit?
Firms of Endearment performed a study over 15 years and found that the cumulative performance of companies that represented the needs of all stakeholders returned 1681% versus the S&P 500 return of 118% on average. As it turns out when you care for people, profit multiplies. Employees are significantly happier, and the returns are fantastic. Caring for people is a multiplier of profit!
In another study by Ideo, companies that have clear purpose were not only more profitable but had 40% greater employee retention, and people were 64% more fulfilled in their jobs. Employee retention contributes to a lasting culture, lower costs, and better service. The organization's purpose imbues the work with more meaning for the employees every day, so they stick around. Purpose is also a multiplier of profit.
Leading with purpose and caring for stakeholders is a strategy that beats the market on returns.
Just on the profitability side, purpose multiplies profit by a multiple of 14 times! Even more, employees are happier, stay longer, and find more fulfillment and joy in their work.
To avoid a 14 times return and greater joy is like sticking our heads in the sand. If you simply invest for profit, you lose out. To be faithful leaders, we must invest in other people and lasting purpose.
How many times do we ignore the opportunities around us to get this kind of return?
Looking at reality can be difficult, even painful. We would rather look at the shiny car on the lot than to look below the hood to see what is really there. When we do, we see the disconnect between what is and what could be. That's why it's so much easier to stick our heads in the sand. It's uncomfortable to come to terms with reality. But that is where our opportunity lies. Reality, even when it isn't pretty, is in our best interest. It gives us the opportunity to get better, become a better organization, and see our return on investment grow.
My longtime business coach, Rod, used to tell me my primary job is becoming more comfortable being uncomfortable. It's true. When I stopped running away from uncomfortable reality and embraced it, breakthroughs and transformations happened.
Proverbs 10:28 says the prospect of the righteous is joy, but the hopes of the wicked come to nothing. The faithful leader will have enduring happiness, whereas the careless leader's efforts will produce nothing in the long term.
As faithful leaders, having a purpose will allow us to lead others in the same way. The vision of the organization that we work for ought to connect with our purpose. Otherwise, it's just a job.
Don't be the head in the sand guy.
Economic value comes down to individual transactions, exchanging money for goods or services. These transactions by themselves, however, do not create a good organization or a lasting one.
If a business decides to do everything someone is willing to pay them for, it's very difficult to get consistent quality. The quality is not repeatable. Further, by trying to solve every problem that could be solved for a customer, it is very difficult to grow because in order to add new customers, the people added have to know how to solve, not just one problem, but all of the problems. Growth grinds to a halt. The organization is not scalable. Until one has a business model, transactions are simply transactions.
A Business Model describes how an organization makes, moves, and measures value.
We will come back to how to do this, but first, let's look at the principles that apply to models in general. They will help us construct a business model that can make a lasting impact. I'll call these principles Momentum Laws.
In business, everyone is looking for an edge to increase the margin of time and money available to fuel ongoing operations and growth. Typically, employees try many small things to eke out additional efficiencies. However, incremental changes usually result in incremental improvements because more significant constraints trap them. In contrast, altering the base assumptions of the business model can remove these constraints.
Let's say we are running a technology services company. We have a customer who wants to have all software up to date and know how to use the software. We can install software packages for the customer and then train the customer's employees on those packages. To improve the offer, we can make incremental changes to install the software packages faster. Yet, if we examine the assumption that all software packages need training, we find an opportunity to improve the model.
If the business eliminates software that does not require training or that does not provide direct value to the customer, we eliminate waste. Further, since the customer wants staff to have and effectively use the software, we could combine the installation and the training into a single transaction. Thus, by examining the base assumptions of the model, we can eliminate waste, increase the value of the transaction to the customer, reduce the friction of purchasing, and lower the cost of sales. It's better for customers, and it's better for the company.
By evaluating the assumptions in the model, we can find better models that will produce better value and returns. Too often, we look for the tweaks rather than look for the changes that make a more significant difference in our business models. Questioning everything leads to new insights and opportunities.
The Momentum Law of Models states that there are a few models that produce disproportionately greater results.
A key to finding which models will give the best results is to identify the variables in the model that yield non-linear growth. A multiplier is a relationship between two variables that measure how much one variable changes in response to a change to another variable. Let's take an example from mathematics. If we double the length of a 2-foot square, it also doubles the width of the square to 4 feet. However, the area of the square quadruples from 4 to 16 feet squared. The length of the square is a multiplier. Moving the length of the square impacts the width, and the area of the square grows.
When we combine several multipliers, they give you even better results. Many multipliers applied to an organization's model result in non-linear growth. For example, consider an organization that has sales of $1M per month, averaging 40% gross profit and 10% net profit. (See Chart 1.) If the messaging is re-focused on the top-selling market of $700K per month, rather than on a general market, sales go up 10%, yielding $1.1M per month, and margin goes up 1% because there are fewer errors for staff to make in delivering the goods and services. Focusing the market is a multiplier that results in higher revenue and profit.
A focus multiplier affects what employees can deliver, the value that customers receive, and can expose opportunities to make a better product. If, as in the software model above, the value to the customer is improved without any increase in cost to deliver, and the price and value to the top market increase 10%, amazing results happen. The revenue swells to $1.18M per month. But, the real impact is to profit because the additional revenue drops right through!
In addition to focusing its messaging, this example evaluated the value it provides, creating many multipliers. By evaluating the whole business model, changing the market focus, and value, profit explodes over THREE TIMES!
Evaluating changes to the base assumptions of a model as volume increases can result in a significant return on investment.
The Momentum Law of Multipliers states that identifying and improving a small set of variables will have a disproportionate effect on the results of the model.
Money is the fuel of the engine of business. Without it, the exchanging of goods and services would slow down, and less benefit and value would be generated.
Assessing the assumptions that go into any business model is critical to get the economics right. But economic models by themselves do not give meaning to a business. Providing meaning to what we do gives the business a purpose to the economic transaction.
Money, technology, power, and authority are all means to an end and not the end in itself. The end is to improve the lives of people and work for God's purposes.
How, then, do we build a business model that multiplies money and meaningful impact?
Working with meaning begins with a great model for creating profit. Yet, it does not stop there. It also includes the impact upon people and the long-term purpose. Let me modify an old story to illustrate each of these perspectives of the business model.
A man came upon a construction site where three people were working. He asked the first, "What are you doing?" and the man replied: "I am laying bricks using my trowel. I am building a wall with my team so we can get paid for making it."
He came upon the second who was working more diligently and focused, "What are you doing?" and the man, replied: "I'm enjoying working with my team to build a great cathedral so that it will enrich the lives of people who come and see this beautiful work!"
As he approached the third, he heard him humming a tune as he worked, and asked, "What are you doing?" The man stood, looked around at his team, then up at the sky and smiled, "I'm building a cathedral so that many people will find their greatest joy and give glory to God. The impact will last forever."
As leaders, we intuitively know that each of these perspectives is valid. Each of them helps us see the multiple perspectives of meaning in our work.
To build a coherent model, we have to answer three pairs of questions:
a. What do we sell?
b. How do we package and price the average transaction?
a. What problem do we solve for whom?
b. What do we do to solve that problem?
a. Why does our organization exist?
b. What is the main talent or capability that we use to pursue our purpose?
Let's take our example up above of a technology services company.
a. What do we sell? Managed technology services
b. How do we package and price the average transaction? $1800 Annual Recurring Revenue (ARR) per person
a. What problem do we solve for whom? We help 50-1000 person organizations transform the way they work.
b. What do we do to solve that problem? We craft purpose powered technology -plan strategy, manage deployment, and train in adopting technology.
a. Why does our organization exist? What change do we want to see in the world? We see people transformed by the love of Jesus Christ.
b. What is the main talent or capability that we use to pursue our purpose? We grow purpose-powered people encouraging them to use technology for meaningful moments.
As a result of clearly defining each perspective, we have connected the economic engine to caring for each stakeholder and the lasting impact of the organization. Defining the business model in terms of purpose, people, and profit helps staff to connect the vision directly to their actions and decisions.
Instead of avoiding profit, the model shows what to sell and for how much. Employees can articulate the customer served, promised results, and how staff achieve it. When the economic model and customer transformation line up with the reason the organization exists, decisions become clear for investing additional time and resources to make a lasting impact.
The faster an organization accomplishes measurable results in each perspective, the more meaningful momentum the organization gains.
Here are the results of one client implementing this. The leaders and staff:
Define your business model using the 3P framework so that you make a lasting impact.
How clear is your organization's model for impacting Purpose, People, and Profit?