I have spent the last several weeks in meetings with Chief Financial Officers and other members of various corporate finance teams. The focus of our round-table discussions has been the changing role of the CFO, the impact of technology, and finally the identification and reduction in risk for the modern corporate entity.
The smarter ones of the groups know that you cannot eliminate risk. In fact, being too risk-averse will simply consign you to the ash heap of history as other firms roll the dice (strategically!) and move ahead in the marketplace. However, modern companies are quick to leverage hedges for currency risk, legal language for contractual risk, and various service-level agreements and warranty reserves to alleviate product risk as both a provider and a buyer.
The issue I like to bring to the conversation is the challenge of human behavioral risk.
Human Behavioral Risk
I refer to is not various forms of malfeasance such as embezzlement or fraud, but instead people doing exactly what they are paid to do, and doing it far too well. This often comes into play when a well-meaning management team decides to try to incent a particular behavior without thinking through all of the impacts of that particular behavior.
Example: I worked with a call center many years ago that measured and paid based on completed calls. Unfortunately, the call center employees maximized their bonuses by taking calls, doing the minimum to manage the call, and then hanging up. The result was an amazing lift in call volume combined with a significantly negative impact on customer satisfaction.
Here is an exercise for the reader: start by learning to play chess. Every single move made on either side of the board opens up new opportunities and closes others. Playing chess thinking only one move at time instead of thinking about the response, counter-response, and end-game is how you end up with your top customers hearing a click and a dial-tone. Understanding how every lever impacts more than just one behavior is a critical component in plan modeling.
Every so-called “bad” behavior of sales reps can be tied to the plan:
- Sandbagging? That comes from having a higher reward for carrying a contract to the next period instead of booking it now.
- Price drops? Your plan is paying for revenue instead of profits.
- Poor add-on sales? The incremental commission for selling a large deal is not worth the delay in the close due to complexity.
- Excessive churn? There is no penalty for selling into a bad fit just to pump the numbers.
How can you prevent this?
When you are in the midst of plan design, SPIF creation, or other types of employee measurement you need to have a member of the team as the designated “opponent” who will propose different ways that they can maximize their rewards, regardless of the impact on the company. That will keep you from having delivery drivers going too fast to hit time windows, call centers from hanging up on customers, or sales reps focusing only on revenue and ignoring earnings due to a plan based on top-line only.