Sustainability... it takes a team!
When it comes to success, most of us can agree that profitability is a key metric. The degree to which a company is profitable is something that everyone from the CEO to the employee’s desire. But profitability and success at a financial level are the emergent part of the iceberg. What lies beneath is arguably as important as the financial results – in fact it often drives the financial results. What lies beneath are the intangibles – those aspects of business that are hard to measure but are absolutely critical to growing and sustaining the value of it. They represent the often overlooked and undervalued aspects of business that, with time, strategy and focus, can maximize results above the water line. These intangibles include the four types of intellectual capital: human, customer, structural, and social.
In its simplest form, human capital is the measure of talent on your team. If you have strong talent, it equates to higher business value. If you have exceptionally strong talent, the type that can run the business without you, it equates to an exceptional business value. For owners seeking to increase the value of their business, recruiting, developing and retaining talent should be your number one priority. While this applies to all levels of a business, it is especially important to have exceptional talent on the leadership team. When executed properly, this team is critical to the long-term success of the business because it creates strategy, drives execution and reduces or even eliminates the need for the owner to be involved. To create an exceptional leadership team may require some hard decisions such as removing or changing existing members or adding new ones. Jim Collins, author of classic business books like Good to Great and Built to Last, emphasizes the importance of continuously considering, “First Who, Then What”. It is more important to get the “right” person than it is to fill the role. Collins’ metaphor of the business as a bus and the leader as the bus driver creates a memorable way to implement the concept:
1. Get the right people on the bus
2. Get the right people in the right seats on the bus
3. Get the wrong people off the bus
4. Put who before what – no matter how dire the circumstance
Initially making talent changes may cause some disruption but the trajectory you can achieve with an exceptional team will make any pain a distant memory.
Customer capital is the strength of your customer base. Having an ability to provide products and/or services that are unique and integral to your customer’s success is one aspect of this type of capital. The other aspect relates to the quality, consistency and strength of the relationships the business develops with its customers. According to Christopher Snider in Walking to Destiny, “How a business interacts with customers is more important than what it sells”. One note of caution relates to customer concentration. “If one customer accounts for more than 25% of your total revenue, it actually reduces your value”, according to Snider. Even if the relationship with that customer is strong, the risk still outweighs the relationship. Consider growing your capital by becoming so entangled with your customers that they can’t live without you. Add sales contracts and other avenues that create long-term involvement to drive additional value.
Structural capital is the business’s infrastructure. It consists of the tools and systems that support the base of customer and human capital that your business is built on. This includes everything from facilities to the customer relationship management (CRM) system to the processes and procedures required to operate the business. Structural capital captures the knowledge assets within your company and converts that into company property – something that is repeatable and transferrable and will increase the value of your business. When this knowledge is captured and formalized it creates sustainability, so that regardless of personnel changes or other company challenges, the customer experience remains the same.
Social capital represents your culture. It is the heartbeat of your organization and can be an unstoppable force in attracting and retaining talent. After all, who doesn’t want to work for a fun, engaging, empowering business that allows employees to grow personally, share in the profits, and experience the opportunities that growth provide? Businesses committed to maximizing their value focus on creating a culture that incentivizes, allows flexibility, lives its values and embraces socio-economic trends that keep it cutting edge. Businesses able to capitalize in this area will discover the return on investment is exponential.
Even though the four aspects of intellectual capital lie below the waterline of the iceberg, they represent the supportive constructs required to maximize above-the-waterline results. Sustainability and value are dependent on the strength of the intellectual capital a business possesses in its people, customers, structure and culture. Leading efforts to strengthen these areas requires a strong leadership team focused on building trust, creating a “fail forward” culture and turning problems into opportunities. How sustainable is your business? Are you focused on growing intellectual capital to maximize the value of it? If not, will this be a focal point in 2019? The time is now to start. It is never too late…until it is.
Jayne McQuillan, CPA, MBA, CEPA is a strategic management consultant, and the owner of Journey Consulting, LLC, in Green Bay