In Freakonomics, Steven Levitt and Stephen Dubner expound on the fact that Economics is, at its root, the study of incentives. The book is full of interesting examples, which illustrate how human behaviour is driven by economics or if you will, incentives. In other words the book describes how economics can drive humans to perform to order, in a manner of speaking.
This is a subject that I have wondered about from time to time as it has often occurred to me that the business world needs to align performance incentives to organizational goals it is sincerely committed to – the emphasis being on sincerely.
In the corporate world, I have often sat in on discussions revolving around the need to change employee outlook and behaviour if the organization is to achieve its goals.
One example that comes to mind is when I was working for a leading advertising agency, Lintas (now Lowe). This was in the early 1990s. At that time, the Lintas management was fretting a great deal on raising the creative standards of the agency. I remember being summoned by Alyque Padamsee a couple of days after I rejoined the Lintas fold, leaving the leading ‘creative’ agency Trikaya (now Grey Advertising). Alyque wanted to know how Trikaya was managing to release award winning campaigns so consistently.
I was rather amused because of the delicious irony. You see, at that time, Trikaya was aspiring to emulate Lintas’s ability to be highly profitable. In fact, it was a big reason why I left Trikaya. My reasoning was simple….if Trikaya was going to turn into Lintas, I may as well go work for the original guru of running a profitable advertising business!
Anyway, to get back, I told Alyque that Trikaya had mastered the art of issuing exciting creative briefs (I had earlier mentioned this in my blog on Corporate Life and the Guru-Shishya Principle). But sometime later, I realized that the real reason behind Trikaya’s consistently high creative standards lay elsewhere. You see, the entire agency saw the creative product as the standard of performance measurement! Ravi Gupta, the founder and Managing Director of Trikaya, never once asked his executives about revenue performance. All dialogue only revolved around work being done on the brands being handled by the Agency.
A year or so after I re-joined Lintas, Alyque retired and Prem Mehta took over at the helm. The internal hand wringing on raising creative standards was still raging unabated. It even featured prominently on the agenda of several offsite management discussions. Solutions offered ranged from forming special creative forces as teams to recruiting talent and conducting workshops for clients.
It was at one of those sessions that I stood up and voiced the point that the real solution lay elsewhere as in my view there was no dearth of talent or ideas in the agency. It was simple really. All that needed to be done was to give the highest weightage to the brand work done by a team when measuring performance. The performance appraisal format and the ensuing discussions had to raise questions such as “By how many points did your brand’s market share increase” or “Indicate changes in your brand’s awareness scores” or “Has your brand’s likability score improved.”
You see, as I voiced then, as long as the first question on the self-appraisal revolved around revenue target achievements, people in the agency would always focus on that goal to the exclusion of all else. Ergo, if a client was happy to release a mediocre ad campaign, so be it. As long as the bean counter kept ticking!
It’s no different from what is happening on the social media scene today. If campaigns are measured by the number of likes, those are easy to buy by throwing money at campaigns and incentivising social media communities to respond. Try measuring campaigns by their engagement rate instead and you will see a different story unfold with both the marketer and the digital agency working harder to get the strategy and the expression thereof right to deliver the desired traction.
Sometime ago, when I read The Snowball: Warren Buffett and the Business of Life by Alice Schroeder, I was struck by an anecdote where either Buffett or Charlie Munger (I forget who) figure out that the reason a new product line was failing to live up to its promise was because the sales incentives continued to favour the existing product line. A simple rejigging of the incentives changed that and the new business line started realising its potential. Yet another example of ‘perform to order’ with the order being issued by incentives.
Think about it and the current system of performance linked incentives being linked to quarterly earnings and share price movements explains why the quality and life of products in mass markets is on the decline.
There was a time when products would last for years. Not today. Everything you need from cars to smart phones to even apparel has to be replaced in shorter and shorter cycles. And not always because of questions of fashion and status. They simply stop working.
There is also no question of getting stuff repaired. Because after sales-service has been outsourced to cut costs and third party agencies are only interested in customers paying for service contracts and not in ensuring that products are kept in serviceable condition. Ever experienced frantic calls to renew service contracts when the same provider has not bothered to fulfill the terms of the said contract? Ring a bell? Anyone? Hello?
Attempts to increase profit margins through cost cutting aren’t even very clever. Most companies just take a hatchet to items they feel they can get away with. Take airlines in India. Ever since low cost airlines entered, the meal tray has seen vanishing accompaniments from jam to after mint sachets. If I were Jet Airways, I would have, at the least, placed a message on the meal tray to seek passenger understanding. Something to the tune of “Our research showed that passengers were wasting 30% of the food items on the meal tray. We therefore decided to serve less and use the money so saved to keep flying you safely and efficiently. 10% of the savings is also being kept aside for Save The Children; an organisation the airline has been supporting for more than 15 years.”
I wonder if anyone has given a thought to what all this cost cutting and planned obsolescence is doing not just to product and service quality but also to sustainable development and the environment?
Ah well….I guess change in business practices will happen only when there is a BIG incentive to bring back quality and customer satisfaction. Not to forget actually practice sustainable development.
Featured Image Credit: Lourdie YMCA Ballet Performance May 19, 2012 7 by Steven Depolo – flickr.com under Creative Commons license