5 Dysfunctions of Using Profit As Your Only North Star Metric
In a capitalistic society, profit is the fuel that allows us organizations to sustain and thrive. It is the fuel that can be used to invest in better and stronger human relationships. When it is used to create more possibilities in the world through re-investment, it is a beautiful thing. We need profit, so that we have the freedom to invest in our long-term future, and without it, it is only a matter of time before we are written into the history books. However, when we choose to make a profit or an ROI (Return on Investment), our ultimate driving metric, as many leaders do, it causes distortions in how the people in your ecosystem think, speak, and behave. We have to stamp out the mantras and leadership talk that worships profit, or ROI (Return On Investment) as the only north-star goal in business.
When we get the hierarchy of our goals and metrics clear for our teams, as a part of our vision, we are more likely to build environments where teams thrive as a result of their motivation and resiliency in the face of an ever-changing environment. It is a “yes, and” problem. We need to make a profit, and we need metrics that will create the space for and focus the intention and attention of the team so that creativity is sparked and progress is made toward these worthwhile goals.
There are many ways that overfocusing on profit leads to distortions in behavior. I’m going to explore five of the top reasons by analyzing them as polarities that demonstrate the need for both with clear dominance applied to the people-oriented, behavioral metrics. The suggestion here is that human behaviors can be measured and that goals that point us toward the purposeful development of human relationships should be at the top of our dominance hierarchy of goals. I call this “The Relationship Ladder” and propose some language for these goals around Trust, Loyalty, and Advocacy.
I will be referring to this diagram throughout the discussion:
1. Lagging vs. Leading Indicators of Success
The first observation is that profit is a lagging indicator. As far as metrics go in business, it is the ultimate lagging indicator. You do not get to see how much profit was actually earned until you have done all of the things required to earn it and keep it. At the end of everything else that had to be done to earn that profit, it is what it is. It is too late to do anything about it.
In our workshops, we ask leaders, so what is the most leading indicator of how much profit will be available to the organization in the future? Alternatively, what is the earliest signal that you get that you will be able to earn a future return? The first answers I almost universally get are “market demand,” “lead funnel,” “sales funnel,” or “our ability to deliver.” All are great answers and are definitely leading indicators for profit. But, I assert that there is something you might measure that is way earlier in your signal pipeline. You can shift your thinking further to the left if you consider that it is possible to measure human behaviors. If you could measure the ability of the organization to build and develop relationships with prospective customers, employees, and existing customers, through their behaviors, that would be the earliest indication of our impending ability to thrive and earn a healthy profit.
The most leading indicator for how much profit will be available to you in the future is the way in which the people in your spheres of influence are behaving today.
It gives you a healthy understanding of whether you would be able to earn more or less profit in the future, based on these trends. You’ll see in the diagram that I labeled the three stages of a relationship between an organization and the people it leads as Trust, Loyalty, and Advocacy. Imagine how much profit might be available if you were to figure out how to maximize the number of customers and employees who authentically trusted you, were loyal, and ultimately, acted as though they were advocates. If you see the number of advocates that your organization is able to produce on the rise, it is pretty easy to assume that you will be able to defend or even improve your future margins.
Again, we need profit, in order to invest in these relationships, but if we don’t put the relationships first in our long-run thinking, we will distort our behaviors for short-term profit-maximizing behaviors that might ultimately sink the ship.
2. Management vs. Leadership Metrics
We manage the numbers in our business so that we can optimize our tactics in the short term. The CEO of a successful manufacturing organization, in one of my leadership seminars, shared this reasoning with me and it stuck. We manage for predictability, it is what allows us to optimize for profit in the short term. It is important to pay close attention to our marketing funnel, our sales funnel, and our operational flow metrics, so that we improve predictability where we want it. But we need a check and balance on what is important to us in the long run.
We manage the numbers for predictability; we lead our people for possibility.
When creativity is needed, leadership is needed to foster the environment that spawns it. Again, we need to manage, in order to get a reasonable amount of predictability, but if we don’t lead by putting our relationship metrics ahead of our profit-oriented metrics, we run the risk of distorting our behaviors and missing out on the creative potential that exists in the people that we lead. Putting leadership metrics before management metrics helps us optimize our system for productive creativity.
3. Efficiency vs. Effectiveness Measures
To play on the language above, efficiency is what we get when we manage well. We need to constantly be on the lookout for the sources of waste in our environment so that we can optimize our profits for future investments. However, efficiency should not trump effectiveness. We are effective with people when we take the time to ensure that their experience is worthy of a long-term relationship. We will know we are effective when we see the behaviors that indicate Trust, Loyalty, and Advocacy. Only after we have proven that we are effective should we be working to tweak our efficiencies to improve our profits.
Be effective at building relationships with people; then be efficient with the numbers that optimize for profit.
4. Finite vs. Infinite Assessments
Finite operational metrics, allow us to see cause and effect in the short term so that we can assess what levers to pull to improve throughput, minimize waste or optimize profit. If we over-focus on any of these operational metrics, however, we run the risk of distorting the whole system.
Try this thought experiment: If we were to say “Optimize for profit,” above all else, there are lots of nasty things we might do in our business to make that so. We might squeeze our employees for everything we could get out of them. We might purposefully nickel and dime our clients to squeeze out more revenue. We might mindlessly forgo those accouterments that are creating advocates in the short term to lock down more short-term profits. There always has to be a loser in that game.
Using relationship-based, behavioral metrics creates a win-win environment for everyone in the game.
If we were to focus on the long game by optimizing for relationships, in the long run, you are playing an infinite game with no clear winners or losers. It turns out to be a win-win scenario over and over again. When you care about your customers and they are authentically advocating for you in return, they are often willing to pay more so that you maintain a healthy, reasonable margin. When there is mutual care, they have little interest in squeezing you for their personal benefit. The incentive, when you have behavioral-based, relationship metrics is actually to prolong the game, as your team is being intrinsically rewarded for doing good work and improving the world for the people they are serving.
In order to earn Trust, you have to be trustworthy. In order to earn Loyalty, you have to engage with your customers and be worthy of that loyalty. In order to earn Advocacy, you have to first be advocating for your customers by working that relationship.
5. Low-Quality vs. High-Quality Motivators
Lastly, the Self-Determination Theory has demonstrated the limitations of externally acting tools, like money on the creativity of people. In fact, one of the three human needs proven to create an environment of intrinsic motivation is called “relatedness.” Relatedness refers to the drive to be cared for and to care for others. Using metrics in your daily conversations that cause this “caring for” to be ever-present is what the social scientists refer to as a high-quality motivator. The difference between high-quality and low-quality motivation is determined by how stable the motivation is when the motivator is taken away.
Try this thought experiment:
Imagine what would happen if profit was your motivator. If it was built into your rituals, your conversations and provided the fabric for your discussions around success. Now imagine that the market changed, causing your business to lose money for a year. What would happen to your team’s motivation and your culture?
Now, flip the script and imagine what it would be like if relationships with your customers and with each other were key motivators for your team and the same market crash occurred. Your culture would be much more resilient and ready to take on challenges to take care of each other and “right the ship” so that profit became available again.
It should be clear by now that I am not advocating for the demonization of profit in any way. In fact, I am arguing for the opposite of that. A great company, operating as a work of performance art, optimizes for the relationships that it builds first and for its economic sustainability second. What results, in the long run, is a steady increase in profits that provide more opportunities for everyone in the future. It creates a win-win scenario for everyone in the ecosystem. Now, if you can’t earn a healthy profit while turning customers and employees into advocates, I assert that you are destined for the history books.
One last argument on this point: When was the last time anyone came to work with a spring in their step and said “I cannot wait to make a profit for the owners of this company?” It doesn’t work that way. You will see distortions in behavior when leaders over-focus on profit which are generally ugly. You will get creativity from your team, but not the kind of creativity that you desire. When the leader says: “We need our primary focus to be on our bottom-line profitability,” the team responds in their mind: “I will get creative in figuring out how to extract as much of that profit for myself.”
What we want for our businesses, is to create environments where people are intrinsically motivated, looking for win-win scenarios, effectively building relationships, leading each other for possibility, and creatively pursuing long-term relationships that are highly profitable.
To get there, start by getting your metrics in proper order.
If you like this, clap, like, share widely, and reach out with some feedback. I promise to honor it. Also, check out this article on the dysfunctions of using surveys as your north star metric.
References:
Inspiring Indicators of Performance, by Sean Flaherty (2018)
The Relationship Ladder, by Sean Flaherty (2016)
An Advocacy Strategy Is Nutrition For a Healthy Culture, by Sean Flaherty (2021)
Why We Do What We Do, by Ed Deci (1996)
