What do investors want, and how can you satisfy them?

In this context, by “investors” I mean professional managers of (mostly) other people’s money, that move millions at a time — not retail savers like most of us with thousands in a retirement account.

Investors want predictable returns that match the risk-weighted expectations for the portfolios they manage.

Every type of investor has a certain risk profile and horizon over which want to achieve returns. And that rate of return will always be compared against some benchmark, hurdle rate, or previous high water mark.

Risk-weighted expected returns are negative here.

Here are some investor type examples, listed in order of decreasing tolerance for volatility:

  • Angel investors want to “give back” to early entrepreneurs by providing their money, advice, and time with minimal expectations of financial return
  • Venture Capitalists will tolerate writing off 9 investments to get one with a 10x exit
  • Private equity partners want 8% IRR in a 6 year horizon
  • Retirement plan administrators want “5 real:” that is, 5% annualized growth after adjusting for inflation and foreign currency exchange

In equity investments, return on capital comes from share price appreciation and dividends. Recently share buybacks have become a hot topic, as an alternative means of returning excess earnings to investors (instead of dividends), but let’s leave that aside for now (instead, read what Matt Levine has written about it). The new theory views public markets as a way to return capital to early stage private investors — again, out of scope for this post.

From this point, let’s narrow the scenario: you are a leader at a publicly traded company. With stock that trades on the public markets, you need to know what kind of returns your investors want. Index funds, representing a large share but not the  majority of equity investors, want the index, which is an aggregate of the prices of the individual stocks in the index, to rise at some multiple of inflation. Some investors speculate on companies being acquired at a premium. Any “long” investor wants prices to grow over time. For a given P/E ratio, earnings growth gets you price growth. Higher earnings growth, sustained over enough reporting periods to establish a new expectation, can command a higher P/E ratio and therefore a greater rate of return on the same annual earnings growth rate.

Drilling down another level, the best way to achieve earnings growth is through revenue growth at constant margins. I say “the best” because revenue has no practical upper limit for a single company, while cutting costs to grow earnings will eventually run out of costs to cut. Revenue growth at constant margins isn’t easy — it’s the stuff careers are made of, or broken by.

I’m fortunate that my entire career has been devoted helping companies achieve more profitable growth, either as a consultant or manager, in both “old tech” and “new tech” industries. I am constantly learning from my direct experiences and case studies of other businesses. Some industries, like energy, healthcare, and FMCG, require significant capital investment across complex global supply chains. Timing these investments within business cycles, maximizing returns of a capital projects portfolio, and pursuing operational excellence are essential in saturated markets with low levels of consumer loyalty and commoditized offerings.

The tech industry contains a different set of growth challenges with different economics: achieving product/market fit then scaling up investment in sales, marketing, support, and infrastructure. Growing markets, loyal (or fickle) consumers, fierce competition for talent and regulatory uncertainty provide endless alternative scenarios for management teams to evaluate when making decisions.

So, when determining what strategy to execute, what projects and initiatives to fund, and generally where to focus your scarce leadership attention, first understand what your investors want based on their expectations for risk-adjusted returns.

Here are some additional resources that you might find useful:

Image credit: Tristan Surtel [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)%5D, from Wikimedia Commons

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What’s the difference between an intern and an apprentice?

All careers start on a steep learning curve: doing new work in unfamiliar surroundings, often with entirely different vocabulary and social norms than we’ve experienced before. “Fake it ’til you make it” is a common survival mode for new hires — and for many professionals, this persists for years as impostor syndrome. Ideally, learning and challenges remain as positive aspects throughout our careers, while confidence and competence replace the new hire’s feelings of doubt and confusion.

“Actually, it IS rocket science…” — NASA/JPL intern

Many professionals start gaining experience as either an intern or an apprentice. What is the difference between an internship and an apprenticeship? Both are temporary positions or limited duration contracts. Both are entry-level roles with no prior experience required, beyond education in a relevant subject.

The key differences between interns and apprentices are the levels of support and expectations applied by the employer’s organization.

Interns and apprentices: different expectations of ability, different levels of support.

As the two-by-two matrix above illustrates, apprentices have both high expectations and high support. Apprenticeship is typically the first phase in on-the-job development of a skilled trade; popularized by the German manufacturing industry and often debated about its adaptation to the US labor market. The apprentice model, however, has expanded beyond skilled trades to tech job categories like software development. Regardless of the industry, employers invest in apprentices because the apprentices represent a valuable future labor pool. Competing firms are willing to invest in apprentices’ development to strengthen the industry without the fear of poaching: employers expect that individual workers are just as likely to join a company from its competitors as to leave. In a 2016 US Department of Commerce study, individual employers reported attrition rates in the single digits, while a broader study by NCEV in Australia showed contract completion rates in the 45%-55% range (slightly higher for non-trades). Performance expectations for apprentices are similarly high, including competency checks, either formal or informal, for apprentices to demonstrate the new skills they develop as they acquire increased responsibility and tackle assignments of greater complexity.

The typical corporate intern sits in the opposite quadrant: low expectations for performance with low levels of support. Employers generally give summer interns low volumes of low-risk, low-priority work, capping off the internship with predictably low-quality presentations. Individual companies, especially those who take pride in seeing their names at the top of ranking tables, might disagree with my categorization. A notable exception is Year Up: despite the title “intern,” the program follows a model much closer to apprenticeship. As a manager, I make the personal investment to coach and mentor interns that I host, and surely other individual managers are willing to do the same. Broadly, however, corporate internships are seen both by employers and interns as networking opportunities, resume padding, and the chance to earn some summer money (and generally to spend it just as quickly while drinking with other interns). 

Two other alternative scenarios complete the matrix. The low-expectations, high-support quadrant is “nepotism:” imagine the young, barely competent relative of an executive or high-ranking bureaucrat coddled and gently steered away from career ending blunders by infinitely patient staff. The high-expectations and low-support quadrant I’m calling “rookie draft pick:” imagine the high-pressure, fend-for-yourself environment described in countless athlete memoirs. Financial services interns might argue this quadrant characterizes their world more accurately.

So whether you are a young professional seeking career-developing experience, or a leader seeking to create a pipeline of high-quality talent, understand what levels of support and expectations are in place. The balance between these two factors will determine the outcomes for your interns, apprentices, princelings, or rookie draft picks.

Image credit: NASA/JPL-Caltech/Alexis Drake

Do you lead like a chess player or a poker player?

Legends spanning history from Marcus Aurelius to Bill Gates to Scott Adams have acknowledged the role of luck in achieving success. Despite this humble and public affirmation of chance’s important role in business success, the social connotations of “games of chance” (better known as gambling) are resoundingly negative.

Ashok asks how much is luck: Dilbert by Scott Adams

Answer quickly, chess or poker: which game has more prestige? Which game has an extra-curricular club with its picture in the high school yearbook? Which game gets played late into the night on boozy weekends with college buddies?

While I’ve never had the patience to improve my skills at either chess or poker, I grappled with this apparent societal contradiction for decades until a recent interview with Annie Duke, author of Thinking in Bets and other brilliant books, brought it all into focus for me.

I’m now convinced that teaching my daughters how to play chess instead of poker would be a major Dad Fail.

The key idea that brought it into focus for me is what Annie Duke calls “resulting.” Learning occurs when we reflect on the outcome of a choice we made, to inform our future choices. As Ray Dalio puts it, “pain plus reflection equals progress.” Daniel Kahneman, and others, explored how biology and society influences our decision making. In the realm of games, chess is deterministic: both players have all the information, and winning or losing a game is causally linked to the quality of decisions you make. Poker, however, is probabilistic: each player’s information is limited, and the outcome of any hand depends to some extent on which card flips over in front of which player (and their seating arrangements), so winning or losing a game is always a combination of decision quality and luck.

“Resulting” means categorizing a decision as good or bad based on whether the situation yielded a positive or negative outcome. This behavior drastically undervalues the role of luck in outcomes, and risks cementing poor decision making habits into the fabric of an organization. Conversely, active separation of the decision from the outcome, and objectively attributing the outcome to either luck or skill, is essential to improving decision making quality.

Business is a game of chance. The outcome of any complex scenario, whether it is an enterprise sale or a marketing program or a fundraising round or an executive search, depends somewhat on which events unfold in which order. In an organization led by a chess player, positive outcomes arise from “good” decisions alone, and negative outcomes arise from “bad” decisions alone. The implications are significant and pervasive: who gets promoted (or fired), which tactics become “best practices” (or taboo), etc., could all be a function of luck. Confirmation bias (among others) becomes cemented in the leader’s inner circle. In an organization led by a poker player, the culture includes open discussion about confidence levels and risk reduction, constructive dissent (i.e., playing “Devil’s Advocate”), and active eradication of cognitive bias.

So consider what example you set for your team, how you coach them to to make better decisions, who you involve in pre- and post-mortems of significant decisions you make. Are you “resulting” or are you leading them like a champion poker player?

Is The Executive Maybe part of your working vocabulary?

Effective leadership requires both decisive action and compelling communication, with integrity throughout. In an economy shifting towards knowledge and service roles, most employees will have more observations of a leader’s communications–both written and in person–than the leader’s direct actions. Think for a moment about the best communicating leader you’ve encountered: he or she certainly has an expansive vocabulary and evocative style. But there’s one little word, when used precisely, that can upgrade any leader’s communications: maybe.

4x08_Red_Hairing_(121)

The Executive Maybe is both stealthy and powerful; like the Jedi mind trick, but without the condescension. After observing the Executive Maybe in its natural environment, I’ve observed two key uses:

 

  1. To redirect a proposal. When an employee proposes a new idea or next step, this flavor of the Executive Maybe applies a very soft rejection and redirects the conversation to another idea. As the pace of the conversation continues, the person who provided the idea likely won’t recall that their suggestion was ignored. Note: this technique is less effective on people familiar with Jack Johnson’s early work.
  2. To set a stretch goal. By invoking a hypothetical future state, this flavor of the Executive Maybe reduces apprehension that often accompanies the challenge of reaching new performance levels. By suggesting “maybe we could…” the leader instills the belief in her team that they can achieve it.

Now that your awareness of the Executive Maybe is heightened, listen for it in your organization and observe its effectiveness. Try it out with your team and see how they respond. It certainly won’t be the most exotic word in your leadership vocabulary, but will it be the most powerful? Maybe.

image credit: arresteddevelopment.wikia.com

I started treating work email like mail, and the universe did not implode

Recently I attended a corporate training session about time management. The course was less a source of new ideas and more a reminder of good habits from early in my career that I’d dropped, like writing down weekly goals and daily prioritized tasks.

Much of the course focused on distractions from our most important work. Technology is a tricky thing: it does exactly what it’s told, sometimes with consequences contrary to the original intent. Email at work, for example, meant to make us more productive by reducing the delays in correspondence. It has done that, of course, to the extreme: most people spend each day in a state of partial distraction as new message notifications pop up on computer screens and mobile phones, dinging and flashing through meetings, and demolishing concentration. Instead of proactively tackling the most difficult and important projects, technology trained us to react to the most urgent requests.

So I decided to start an experiment. I treated work email like mail: reading and responding once per day, not letting it interrupt my work or meetings during “office hours.” Here are the specific steps I took:

  1. Blocked an hour of my calendar each day from 7:30am-8:30am to read and respond to email messages, and make a prioritized list of daily tasks. I support both the Inbox Zero and three.sentenc.es philosophies. Each Monday and Friday session is 30 minutes longer, so that I can reflect on what I achieved that week, reflect on lessons learned, and set objectives for the coming week.
  2. Shut down all the notification features of my desktop and email clients, so that I can choose when to check my email. I did make one exception: my mobile client has a VIP feature that allows notifications from certain contacts (e.g., the C-suite at my company) and domains (e.g., a key customer account). I use Nine Folders and other clients may have similar features.
  3. Added a note to my email signature reminding internal recipients that while I don’t monitor incoming email during office hours, I do maintain a “SLA” to read and respond within 24 hours. The signature also reminds them to contact me through another channel if their message is truly urgent. My company has at least three chat platforms, and the corporate directory lists my mobile phone number, so plenty of alternative digital channels exist.

The result? Simply put, success. I feel so much less frantic and distracted throughout the day. I’m present and participate throughout meetings. I start and end tasks at my desk without interruption. I often send emails during the day, e.g., when shipping off a deliverable to complete a task, but I suppress the urge to pour through my inbox until the morning. My attitude towards the daily task of inbox maintenance is somewhat childlike with anticipation–anything good today? A handful of my coworkers made supportive comments; no signs of snark or frustration. In weeks, no one has come after me, angrily demanding a response to an email they sent a few hours earlier.

This experiment reinforced that the heightened sense of urgency I attached to email messages, and the feelings of anxiety I felt towards being responsive to those messages, were entirely self-imposed. And therefore I had complete power to remove the anxiety by changing my attitude and my daily habits about my inbox. If you’ve felt the same, try the experiment and see if you can replicate my results. Please leave any comments or questions below.

Why you should run your business process like a refinery

Regardless of your position on fossil fuels, the sheer scale, complexity, and ferocity of a refinery will strike you with awe. At a refinery, as with any other process manufacturing facility, the best days are the boring days–ideally without any “unplanned pressure releases” similar to those experienced in the rocket industry. The cost of mistakes, in terms of operating income without considering the employee or environmental risk, can easily reach millions of dollars per day.

So, as we examine our own careers in search of fresh ideas and inspiration, an important performance metric from the process manufacturing industry called OEE can help.

OEE stands for Overall Equipment Effectiveness and is measured on a scale from 0% to 100%. While I will avoid an extended discussion of how to establish the 100% level, understand that OEE is the product of three terms: availability, utilization, and yield. Let’s explore how any business process owner can benefit from getting these three terms as close to 100% as possible, typically in that order.

Availability: when I push the green button, does it go?

Availability measures what percentage of total time a process or asset is ready to run when called upon. Avoiding the nuances of this calculation, let’s look at why availability matters in a business setting. Perhaps you are responsible for an email marketing system, or a database, or even human assets like a sales team. How much downtime does this asset experience? How often do the emails fail to send? How often is the database offline? How often does a sales rep call out sick or no-show for meetings? Clearly to make any significant improvement in overall performance, the availability of an asset or process needs to reach a moderately high and sustained level. Furthermore, the people responsible for the asset or process won’t gain the trust of the rest of the organization or have the credibility to advise on more complex issues until they get their availability in order. So, for most leaders, improving availability is a critical first step.

Utilization: when it’s available, is it running?

Utilization measures the percent of available time that a process or asset is operating. Any time spent idle, either waiting for inputs from an upstream process or waiting for a downstream process to take away its outputs will penalize both utilization and OEE. If availability is about solving maintenance and reliability issues, then utilization is about planning, scheduling, and load balancing across assets and between departments. Your database job schedule might need a closer look, or your lead flow process might need tweaks to keep a steady pace of calls and meetings in front of your sales team. Step back from an individual asset or process to look for gains in utilization at your “bottleneck” in order to reap the largest overall results.

Yield: when it’s running, is there zero waste?

Disciples of the Lean movement will readily rattle off the seven flavors of muda, or waste. Generally, yield losses occur when running at less than 100% speed and/or producing less than 100% first level quality output. Whether comparing the results of your asset/process to an external benchmark, an internal best, or a design capability, you will likely find yield opportunities easily. Typically yield optimization is the most interesting type of problem to solve because it requires delving into the unknown. For high availability systems, it is also the most frequent problem to solve–if it ain’t running, you can’t work on yield! So whether you are looking for a higher email conversion rate, lower error rates on database jobs, or higher win rates on sales opportunities, yield optimization is likely a well-trodden path for your team, and the harder you look, the more you will find.

Where to start? Follow the money

An optimist will see a low OEE system as a playground full of valuable and interesting opportunities. When looking across the areas of availability, utilization, and yield, it’s likely that different people will have different opinions on where to start. A straightforward and non-confrontational approach is to value each opportunity with a common metric, like $. With a straightforward spreadsheet you will be able to value what a 1% improvement in availability, utilization, and yield–above the current baseline values and holding the other two constant–will be worth on a per day or per year basis. This should not prevent your team from making improvements in all areas, instead it should inform prioritization in a resource-restricted world.

So whether you are a database administrator, marketer, or sales manager, take a page from the refining world and think about how to maximize your OEE. And you won’t even have to put on fireproof coveralls to do it.

To Improve the Leadership Training Experience, Think Like a Marketer

Marketers’ timeless obsession is “getting the right message to the right person, at the right time, through the right channel.” As a consumer who is bombarded by marketing messages on nearly every visible surface during every waking hour, you know intuitively that some messages resonate strongly and most are just background noise. Research backs this up: referrals consistently generate the highest conversion rates, while direct mail, email, phone, and display ads can be hundreds or thousands of times less effective (see Marketo, Marketingcharts, MarketingSherpa for details). When Carla (the happy customer) recommends a widget to Sam (the shopper), Sam is much more likely to make a purchase than if the same brand shows up in Sam’s mailbox or browser.

Why do referrals perform so strongly? Two main reasons:

  • The message is timely and relevant. Sam and Carla know enough about each other for Carla to understand what Sam’s needs are, why her experience with the widget would be meaningful to Sam, and when to bring it up so that Sam will listen and take action. This is the classic “why me, why now” message that sales and marketing experts like Jeb Blount and Mark Roberge reinforce. Perhaps even more importantly, Carla knows what Sam doesn’t need right now and doesn’t waste both of their time pushing irrelevant widgets.
  • The source is trusted and credible. Again this relies on a minimum strength of relationship between Sam and Carla such that Sam is more likely to act on Carla’s advice than another person’s. Right now, we won’t explore the psychological dynamic and value exchange going on between these two, but it’s fascinating stuff that Daniel Pink, Robert Cialdini, and the Heath brothers (among others) have written about in detail.

What does this have to do with leadership training? Let’s assume that the organization’s objective is to accelerate the leadership capabilities of their mid- and senior-level staff. This starts with the necessary and insufficient step of achieving high participation in training activities. So here’s how to map the two marketing principles above to your leadership training challenge.

Segment your leaders based on prior experience

Some training content is about compliance; this is mandatory for everyone. For the rest, each of your staff will have either high or low experience along these dimensions:

  • leadership skills: providing direction, inspiration, coaching/mentoring, etc. to a build a great team
  • management skills: prioritization and “load balancing” to enable a group of resources to complete their work on time, at high quality, and efficiently
  • navigating your company’s HR systems: understanding the processes and tools for talent planning, recruiting, performance management, compensation, etc.

By segmenting your leaders based on these attributes, you will find a better match between audience and content, which makes the message more relevant. Then, by scheduling the training events based on the events in the leaders’ lives (e.g., around hiring, performance review or promotion cycles, etc.) the message will be more timely.

Send the message from a respected, successful leader

Personal trainers who are less fit than their clients won’t stay in business for long. Yet many organizations tolerate leadership training to be run by employees who are not successful leaders, not effective training facilitators, or both. Ensure that the people in your organization who send the call to action for leadership training, and the people who deliver the training events, can “walk the talk.” These might be the senior leaders within your organization’s business lines, or from external non-competitive organizations. This ensures the message comes from a credible, trusted source.

The best marketers and the best leadership trainers have a common motivation: they are passionate about their widgets and believe their customers will be better off with the widget than without. So try thinking like a marketer to improve the outcomes of your company’s leadership training experience.