Looking Beyond Short Term Financial Metrics (Nigel Lake, Part 2 of 10)

Looking Beyond Short Term Financial Metrics

(Source: Flickr)

This is the second instalment of my conversation with Nigel Lake, CEO of Pottinger, a global corporate advisory firm based in Sydney, Australia. Nigel is the author of The Long Term Starts Tomorrow, a must have book “for any manager, leader or Minister.” The Hon Mike Baird MP, Premier of NSW

Tom: Do you think that short term financial metrics are part of the problem in developing long term strategy?

Nigel LakeNigel Lake: Absolutely, I think they are a very fundamental part of why very large organisations don’t make good decisions on an amazingly frequent basis.

A simple analogy is that if you’re driving down a motorway you actually need to look further ahead, and if you stare just in front of yourself you will crash and probably die.

Very large organisations do this.

Nokia is a very good example of a company [that was dominated by this kind of myopia].

One of my colleagues at Pottinger held an iPhone in his hand in about 2003, which was four years before Apple had the iPhone, except that the iPhone said Nokia on the bottom of it.

But everyone at Nokia knew that people liked candy bar phones and that that would never change, and so they never launched the iPhone.

Tom: Oh really? So Nokia had the technology to develop and produce an iPhone several years before Apple released it?

Nigel Lake: A phone which for all intents and purposes was very much an iPhone like device.

Now the even deeper point is that people who worked in technology knew that something like the iPhone would come about roughly when it came about in at least the early 90’s.

The iPhone was essentially a proper computer which was small enough to be a phone, and to get there was a journey of miniaturisation of processes, improving battery technology to be able to store the power to run the phone for long enough that people would think it was useful, and the improvement of the screen technology.

All of those things have been on Moore’s law progressions for an amazingly long period of time, and those things all crossed over to be a computer like phone some time in the middle of the first decade of the naughties.

People knew that was going to happen ages ahead but large organisations did nothing about it. HP is an example. I know there were people working at HP in the early 90’s in the UK who said “these things are coming”, but no one was interested.

It’s ten years away, why would you bother? And for Nokia it was five years away, and it’s like, why would you bother? And then Apple comes along, and Nokia goes from being the biggest phone company in the world to not being a phone company.

Tom: That’s very interesting. One of the ideas that I’ve been thinking about recently is that financial metrics are basically designed to evaluate how much you are getting out of a company, your cash flow take from the company. But the goal of a company is actually to give value to customers and to the community. And so, there appears to be a disparity between what companies do and what the metrics are measuring. What are your thoughts on that?

Nigel Lake: That is absolutely right, and I’ve spent quite a lot of time thinking about precisely that set of issues.

Where my own thoughts have gone is that if you take a very short term approach then there is a massive conflict between what’s in the interests of shareholders and what’s in the interests of customers. The shareholders just want to sell as much product for the highest possible price, never mind the quality or impact on any other stakeholder in the entire ecosystem, and then pocket the profits and run.

If you take a longer term view then the financial metrics will tell a different story, which is that if you abuse your suppliers and you abuse your customers then they will go away and you won’t have a business left. The high profits in year one may turn into no market capitalisation by year five.

A lot of people have worked through this saying, okay short term financial metrics don’t work, let’s look at different forms of triple bottom line reporting or measures of broader impact.

One of my friends runs a US business called HIP Investor (for Human Impact + Profit) which is a sustainable investment type business where they have created a set of metrics which measure the sustainability and non-financial impact of an organisation. They apply those metrics to all the companies in an index, re-weight the index along this new sustainable basis, and an investment in their portfolio (which is a re-weighted index portfolio) outperforms the index and has lower risk.

So you can go down that path, but where I’ve gone down is a different route to the same answer, which says that if you take a longer term view you will make different decisions about how you should treat all the stakeholders in the ecosystem. And you will then start to realise that thinking more broadly about how you create value is very much in the interests of your company.

One of my current areas of focus is this broader area of sustainability. I think that there are amazing opportunities in that. The Royal Mail in the UK is one example of an organisation that really drove this kind of mindset over a fair period of time, and from what I understand achieved quite significant results in making the whole thing more efficient, and having better environmental outcomes as a result.

Thinking About the Long Term First (Nigel Lake, Part 1 of 10)

Thinking About The Long Term First

(Source: Flickr)

This is the first instalment of my conversation with Nigel Lake, CEO of Pottinger, a global corporate advisory firm based in Sydney, Australia. Nigel is the author of The Long Term Starts Tomorrow, a must have book “for any manager, leader or Minister.” The Hon Mike Baird MP, Premier of NSW

Tom: Nigel, I had intended to ask you questions about Pottinger and your recruitment process but I was reading up on what you’ve been doing and I’d be interested to instead talk to you about your book, “The Long Term Starts Tomorrow”.

Nigel LakeNigel Lake: Those two things are somewhat related, but I’m very happy to do that. Just fire away with anything you wanted to ask. Let’s get into it.

Tom: A lot of tech companies were invented by college students in dorm rooms and the Internet poses a continuing threat to the business models of many established companies. From what I understand your book is really about innovation and the ability to make short term decisions that are going to stand the test of time. Is that an accurate characterisation?

Nigel Lake: Yeah, it’s an interesting thing, it kind of goes deeper than that, and I’ll give you a bit of context and then you’ll understand why I’ve written it the way I’ve written it.

There is lots of evidence that the way that people make decisions in the business world doesn’t work especially well, and a simple example is all these crazy young kids who created trillions of dollars of value, and the old guys surrounded by lots of advisors didn’t.

If you peel it back, what are the things that are going wrong fundamentally with decision making?

One of the deep problems is that the whole architecture that we live in for decision making focuses people’s minds on the short term.

You see that in a qualitative sense in terms of the reporting cycle and in terms of what analysts want to see and what CEOs then go and do. But you also see it in a very quantitative sense in the world of discounted cash flow models and the whole economic architecture which I describe as a kind of cult of economic rationalism.

People have picked up that way of doing things which came out of the 1950’s and early 1960’s, and in fact some of it goes back to the 19th century.

No one has really done anything different since.

Nobody has stopped to think about the fact that the pure mathematics of those models drives you to focus on the first five to ten years and encourages you to ignore everything after that.

Many of the great successes and great failures over that period came about because people precisely ignored what would happen a little bit further down the road.

At Pottinger we do a whole bunch of work around infrastructure, for example, and one of the fundamental problems most major economies have is that they need to rebuild crumbling infrastructure and build new infrastructure.

They struggle to justify the costs and returns that they are going to get, and part of the reason is that people are trying to build 100 or 200 year assets on the basis that it should pay for itself in 30 or 40 years.

It’s just not going to work.