Last night, my daughter brought home a math test that she’d got 95% on, and she was beaming with pride. It was amazing to see it made me so happy! It also left me a little baffled.
I was not what you’d call a math whiz when I was in school. I did okay, but I never loved it. I didn’t care how many apples Johnny took from Suzy, or how many she had left. Later on, I didn’t care about solving for X.
I never dreamed then that I’d be using some of that same math to help senior executives make million dollar decisions, but the truth is that I help my clients reframe tough decisions using probability on an almost weekly basis.
Last week, I wrote about the incredibly high cost of procrastination. In essence, I pointed out that if you’re considering high impact work, you will often lose more money in lost revenue by delaying the project than you will pay for the project fees.
This week, I want to talk about the flip side of that – what happens when you spend on an improvement initiative, and it fails?
Doesn’t that negate the positive effects? Does that mean you shouldn't have done it?
The short answer is simply no.
Here’s what I’ve found over the past ten years – when you start to look at management through the lens of R&D, it becomes exponentially easier to adopt a data-driven management approach, which allows you create transformation in your organization at lightning speed.
What do I mean by the lens of R&D?
Simply put, I mean the practice of committing to taking an iterative approach to introducing change in your organization, with the knowledge that some will fail spectacularly, some will win dramatically, and many will have a minor impact.
Consider this example based on a manufacturing client I worked with recently:
You have a sales team that’s stagnant.
You’re doing $50M/year in revenue, but you think that you could be doing at least $60M/year in revenue if you added in all the “best practice” sales management approaches that I talk about so often in my tidbits.
For easy math, we’ll assume a $200k cost for the improvement, and we’ll assume there’s only a 50% chance of success.
If you’re right, you get a $10M increase in revenue and it costs you $200k.
Let’s call it a $9.8M net gain (and we’ll even avoid counting the increased revenue for all other years, just to make this super conservative and simple).
If you’re wrong, you’re out $200k.
So there’s a 50% chance of a $9.8M upswing in revenue.
There’s a 50% chance that you’ll be down $200k in project fees.
If you add those together, the “expected value” of the project is $4.8M.
Of course, few improvement initiatives are ever really a coin flip… In this case, if you think there’s a 70% chance of success, then the expected value goes up to $6.8M.
But even if you thought there was only a 5% chance of success, the asymmetry between success & failure here gives a $300k expected value to the project (5% * 9,800,000 + 95% * -200,000).
Think about that – If you think that the project has only a 5% chance of success, it’s still a 150% ROI of your $200k spend!
You’d be crazy not to roll those dice.
If it succeeds, you come out ahead. If it fails, you can learn what part didn’t work, and try again.
Taking this approach will lead you breakthroughs that you’d never get by simply hoping that the world isn’t going to change and that what you’re doing today will still be effective tomorrow.
When I work with my clients, one of the most important things we do together is to find the opportunities for the most significant upswings, no matter what the “odds of success” are.
When the benefits are big enough, even a mere 5% chance of success make it profitable, and the more realistic 70%+ odds of success mean that the investments are a no-brainer.
Your Challenge For This Week:
Work backwards from the end.
First, think of 3-4 ways that you could increase your revenue by 20% or more this year without worrying about if they're feasible.
EG: Raise your prices by 20% without losing a single client; increase your sales by 20% without hiring more salespeople; increase your upsell/cross-sell/ purchase frequency by 20%; get referrals from 10% of your clients that lead to business, which will increase your sales by 20%.
Next – Consider how you might put that into place.
For the "increase your sales by 20% without hiring more salespeople", the answer is probably something like "Ensure we have a solid sales process in place; ensure we're tracking salespeople performance against that process; set up coaching and training to help low performers improve their sales; set up automated reporting to ensure no leads are falling through the cracks; etc"
Finally, start pricing out options to get that improvement.
If you do $30M+/year in sales and can find a way to put those improvements into place for $150k, then it's a no brainer.
Even a 10% chance of success makes it worthwhile, and if you think you've got a significantly greater opportunity, then jump on it!
Best,
Noah
