The Revenue Game, Part 3: Structure, Leverage, and the Cost of Chaos

By Rick McPartlin

Editor’s Note: This article is the third in a three-part series. Revisit Part 1 here or Part 2 here.

Alignment (Revenue Strategy + Execution) x (Structure)

Variable 4: Structure

Every organization has applied structure either intentionally or unintentionally and sometimes both. Companies create process, brands, messages, literature, training, software tools, etc., all to help the execution function deliver more results as measured by things like RPE (Revenue Per Employee). The variable of structure needs to be measured for its impact on the ability of execution to deliver profitable results.

The investments in structure come in almost unlimited forms, and each form always needs to be recognized as a separate investment and measured against the change in execution. If the resulting change in execution creates a positive ROI – great! If it isn’t positive, then you must decide if it can be modified to become positive, and, most importantly, compare each possible investment in structure to every other possible structure option (in every part of the organization) to determine the combination of investments that yields the greatest overall increase in execution when plugged into the formula.

There is ONLY ONE PURPOSE for structure, and that is to improve execution. NEVER invest in structure without knowing the organization’s current assumptions about the benefits the new structure will provide for the improvement in the execution of profitable “Revenue Generation.” After investing in the structure, immediately start measuring what really happens at the point of execution and compare that to the investment assumptions to determine if you can make changes to further improve execution to secure the best possible return on resources.

The last variable, and one that the CEO and their CROs must manage across the organization, is Leverage. Leverage is the result of investing in structure. If structure is well designed and managed, the result is positive leverage. If structure is not well designed or managed, the result is poor or even NEGATIVE leverage, which is very risky.

Managing the organization for the highest Leverage from available resources is a critical leadership function. Successfully managing leverage requires asking different questions and adding new metrics to be sure the ROI is the best possible for the combination of the short-term and long-term growth of profitable revenue.

Alignment (Revenue Strategy + Execution) x (Leverage x Structure)

Variable 5: Leverage

Leverage – advantage, power, gain or profit acquired by using some form of tool, lever, structure, knowledge, process, unfair advantage, science or intellectual property , creating more results with available resources

We all want the highest possible leverage from our invested resources. The purpose of business structure is to create positive leverage in an organization’s ability to improve execution related to growth and profitability. Leverage is either positive or negative and normally falls between -100 and 100. The impact of the leverage shows up in metrics such as revenue process improvements, more profitable revenue for the dollars invested (short-term and long-term), or in RPE (Revenue Per Employee).

If the brand is powerful enough to draw customers, or if aligned execution creates repeat business and referrals, then the leverage is positive. Conversely, if the whole organization attends product training to learn how to pitch the product in detailed PowerPoint presentations, and how to deliver specification-heavy demos and how to create web videos that talk about the vendor’s history, then buyers will be convinced that the vendor’s goals aren’t about solving the buyer’s problems, but rather about creating a transaction with the buyer for the vendor’s profit. This is negative leverage – it hurts sales and profits in both the short and long term.

The CEO will be measured by, and ultimately succeed or fail based on, the degree of leverage for invested resources measured at the point of execution.

Strategy, Execution, Alignment and Structure — as applied individually and as a group — control both the nature (positive or negative) and the amount of leverage, which creates change at the point of execution. The CEO’s job is to apply these variables to achieve maximum leverage, growth and profits.

Here’s another look at that formula:

Alignment (Revenue Strategy + Execution) x (Leverage x Structure)

Most organizations only focus on two things (execution and structure), and both of those things require BIG budget allocations. Execution and structure are the two things a leader can buy with the expectation that things will get better, which may or may not be true. And taken alone, these factors never deliver predictable results.

In truth, large amounts of money are misspent on execution and structure, resulting in negative leverage and an increase in the “Cost of Chaos.” The danger is that when a product, a service or an economy is extremely HOT, then companies can grow even with negative leverage and poor alignment at their foundation.

Staff, CRM, training, advertising, trade shows, and websites are large investments, which often have little or no alignment and lots of negative leverage. That means they not only fail to help get more profitable revenue, but they actually increase the Cost of Chaos, while holding down topline growth and reducing EBITDA. Nobody wants that, but we keep doing it.

As the Cost of Chaos increases, any additional revenue growth requires spending more and more money (on execution and structure) to get smaller and smaller returns (both topline and profit).

This is why an organization can be operationally excellent and even win all kinds of awards for excellent structure (training programs, websites and super bowl ads) while their problems get bigger and bigger, because of smaller and smaller profits.

Everything a team does, every dollar spent is either aligned to the revenue strategy (assuming there is one that answers the five questions) — or it isn’t. Each action and every resource investment creates either positive or negative leverage as measured by its corresponding impact on growth and profits. The goal is to get maximum Alignment and Leverage. The way to achieve this goal is to manage the Formula and each of the Five Variables.

The choice is to apply this formula in an intentional way that requires the organization to apply the discipline of revenue science focusing on all five variables, or let the world decide how to apply the formula to the organization.

Any organization that wants help applying this formula should join those already thinking like a CRO and focus on applying the science of “Revenue Generation.” You can find these leaders in various discussion groups, writing blogs and creating communities with a similar focus.

Every CEO who is willing to do the work to succeed in the 21st century will reach out and start applying this formula to their company.

Alignment (Revenue Strategy + Execution) x (Leverage x Structure)

Revisit Part One or Part Two of this series.

Rick McPartlin is the CEO of The Revenue Game and is a revenue generation consultant and Vistage speaker. McPartlin was a Vistage member development chair from 2002 to 2009.
Originally published: Feb 6, 2012

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