I recently presented at an analytics conference where a speaker in one of the customer marketing tracks said something that stimulated my thinking. He said, “Just because something is shiny and new or is now the in’ thing, it doesn’t mean it works for everyone.”
His statement got me thinking about some of the new ideas and innovations that organizations are being exposed to and experimenting with. Are they fads and new fashions or something that will more permanently stick? Let’s discuss a few of them.
Visualization software is all the rage these days. Perhaps when you were a child your mother told you, “Looks are not everything.” Well, she was wrong. Viewing table data visually, like in a bar histogram, enables people to quickly grasp information with perspective. It might be nice to import your table data from your spreadsheets and display them in a dashboard, but be cautious! What are the unintended consequences of reporting performance measures as a dial or barometer? A concern I have is that measures reported in isolation of other measures provide little to no context as to why the measure is being reported. Ideally, dashboard measures should have a cause-and-effect relationship with key performance indicators that should be derived from a strategy map and reported in a balanced scorecard. KPIs are defined as monitoring the progress toward accomplishing the 15 to 25 strategic objective boxes in the strategy map. The strategy map provides the context from which the dashboard performance indicators can be tested and validated for their alignment with the executive team’s strategy.
Talk about something that is “hot.” Who has not heard the terms big data and business analytics? Business analytics is definitely a current managerial wave. I am biased toward analytics because my 1971 university degree was in industrial engineering and operations research. I love looking at statistics. So do television sports fans who are now provided “stats” for teams and players in football, baseball, golf and every kind of televised sport. But the peril of business analytics is they need to serve a purpose for problem solving or seeking opportunities. Analytics thought leader James Taylor advises, “Work backwards with the end in mind.” That is, know why you are applying analytics. Experienced analysts typically start with a hypothesis to prove or disprove. They don’t apply analytics as if they are searching for a diamond in a coal mine. They don’t flog the data until it confesses with the truth. Instead, they first speculate that two or more things are related or that some underlying behavior is driving a pattern seen in various data.
Customer Lifetime Value
Savvy C-suite executives understand that the goal of sales and marketing should not be just to grow sales and increase market share. It should also be to grow more profitable sales. They realize that below the product-related gross profit margin line in the profit and loss financial income statement, high-maintenance customers (e.g., those requiring special treatment or frequently returning goods) have higher “costs-to-serve” compared to customers who require less attention. Hence, customer profitability analysis using activity-based costing principles are pursued. And when customers are viewed as an investment rather than as an expense, the customer lifetime value equation calculates forecasts of multiple years as a discounted cash flow. The peril is that companies should not just rank the highest CLV customer to the lowest one and then devote marketing and sales budgets and efforts to customers with the highest CLVs. The critical resource allocation rule should be that the incremental revenues from a customer should exceed the incremental effort and cost (e.g., deals, offers, discounts) to increase those sales. A low CLV customer may provide a relatively higher profit lift from an offer or deal compared to a high CLV customer. Marketing ROI measurements are needed that are rank-ordered by customer.
Rolling Financial Forecasts
The dirty little secret that most people know is that the annual budget has become a low value exercise. Budgets quickly become obsolete. Today there is too much volatility, sand-bagging cost center managers, and baked-in inefficiencies based on the past year’s baseline spending from which budgets are typically incremented. The CFO’s shiny new toy is driver-based budgets. This advanced spending projections method relies on modeling parameters from sales forecasts (i.e., the primary independent variable) and from recent period calibrated cost consumption rates of business processes and the work activities that belong to them think activity-based costing. And once you can model the future projected headcount, equipment capacity, and spend levels for the budget, why not re-model them at more frequent intervals (e.g., quarterly, monthly) and abandon the budget process altogether? But the perils are poor forecasts, unreliable cost consumption rates, and neglecting to include sufficient spending for capital, strategic and risk-mitigating projects. No wonder people say that the budget is a fiscal exercise done by the accountants that is future volume-insensitive and disconnected from the executive team’s strategy and enterprise risk management plans.
Fads and Fashions?
Are these fads and fashions or the real deal? Are managers attracted to them as the shiny new toys that they must have on their resume for their next bigger job and employer? My belief is these four “hot” managerial methods and tools are essential. However, they need to be thought through and properly designed and customized; not just implemented willy-nilly just to have as shiny new toys.