# Profit as a Sole Metric: Unpacking the 5 Dysfunctions
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Chapter 1: The Role of Profit in Business
In a market-driven world, profit serves as the essential element for organizations to flourish and endure. It enables investments in stronger interpersonal connections and creates opportunities for broader societal impact through reinvestment. Profit is crucial; without it, an organization risks fading into obscurity. However, when profit or ROI (Return on Investment) becomes the sole focus for many leaders, it skews the perspectives, language, and actions of individuals within the organization. It is vital to challenge the narrative that views profit as the only guiding principle in business.
By clarifying our hierarchy of goals and metrics within our organizational vision, we foster environments where teams can thrive, driven by motivation and resilience amidst constant change. This is a dual challenge; while profit is necessary, we also require metrics that foster creativity and direct the team's focus toward meaningful objectives.
Overemphasis on profit can lead to various behavioral distortions. In this discussion, I will delve into five primary dysfunctions, analyzing them as polarities that highlight the necessity of prioritizing people-oriented behavioral metrics. I term this framework "The Relationship Ladder," advocating for goals centered around Trust, Loyalty, and Advocacy.
Section 1.1: Understanding Indicators of Success
The first point to consider is that profit is a lagging indicator. It reflects past activities and cannot indicate success until after the necessary actions have been completed. By the time profit is assessed, it is too late to make impactful changes.
In our workshops, we often ask leaders to identify the most predictive indicators for future profit. Typical responses include "market demand," "lead funnel," or "sales funnel." While these are valid indicators, I propose considering human behaviors as an even earlier signal. If organizations can measure how effectively they are building relationships with potential customers and employees, they gain early insights into their capacity to thrive and achieve sustainable profit.
The key determinant of future profit lies in how individuals within your influence are behaving today. Positive trends in Trust, Loyalty, and Advocacy among customers and employees can indicate healthier future margins. Thus, while profit is necessary for investing in relationships, prioritizing relationships in long-term strategies is crucial to avoid behaviors focused solely on short-term profit maximization.
Section 1.2: Metrics of Management vs. Leadership
Effective management revolves around optimizing short-term outcomes, with leaders often focusing on metrics that enhance predictability. A CEO once shared that managing for predictability allows for short-term profit optimization. While it's essential to monitor marketing and operational metrics, we must balance this with a long-term vision.
Management is about predictability; leadership is about possibility. Creativity flourishes in environments that prioritize leadership. Although management plays a role in achieving predictability, neglecting relationship metrics in favor of profit-centric metrics can hinder creativity and the potential of the individuals we lead. By prioritizing leadership metrics, we can enhance our systems for productive creativity.
Chapter 2: Balancing Efficiency and Effectiveness
To optimize profits, we must focus on efficiency—identifying and eliminating waste. However, efficiency should not overshadow effectiveness. True effectiveness arises from ensuring that relationships are nurtured for the long haul. Indicators of Trust, Loyalty, and Advocacy signal that we are engaging effectively. Only after establishing effectiveness should we refine efficiencies to boost profits.
Prioritize relationship-building, then focus on numbers that drive profit optimization.
Section 2.1: Finite vs. Infinite Metrics
Finite operational metrics help us identify cause-and-effect relationships in the short term. Yet, overemphasizing these metrics can distort the overall system. If we fixate solely on profit, we may inadvertently exploit employees or shortchange clients in pursuit of immediate gains, creating a lose-lose situation.
Conversely, focusing on relationship-based metrics fosters a win-win environment. Prioritizing relationships leads to a sustainable approach, where mutual care allows customers to pay more willingly for services, maintaining healthy margins. In this scenario, both teams and customers are intrinsically motivated to collaborate for long-term success.
Section 2.2: Quality of Motivators
Lastly, the Self-Determination Theory highlights the limitations of external motivators like money on creativity. One of the key needs for fostering intrinsic motivation is "relatedness," which emphasizes the importance of caring for others. Metrics that encourage this "caring" represent high-quality motivators.
Imagine if profit drives your team's motivation and a downturn occurs. The culture may falter. However, if the focus is on relationships, the culture remains resilient, enabling the team to overcome challenges and restore profitability.
In closing, I advocate for an approach that does not demonize profit. Rather, successful companies prioritize relationship-building before considering economic sustainability. This approach leads to a gradual increase in profits, benefiting all stakeholders. When organizations fail to balance profit with relationship advocacy, they risk becoming relics of the past.
It’s essential to cultivate environments that inspire intrinsic motivation, embrace creativity, and focus on long-term, mutually beneficial relationships. To achieve this, start by realigning your metrics effectively.
If you found value in this discussion, please like, share, and provide feedback. Your insights are always welcome. Additionally, consider reading about the dysfunctions associated with using surveys as a primary 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)