Manage What Matters

Great experiences lead to great finances. So why do we measure the latter and ignore the former?

“Why do companies fail?

This question is what inspired Professor Clayton Christensen to pursue his work on the theory of disruption. There are many startups out there that manage to identify and meet a customer need. They become successful; they grow big. Systems are put in place to manage the scale they achieve. They start to focus on different things.

And through this process, those big, successful companies open themselves up to being beaten.

They never set out for this to happen. Nobody ever does. And yet somewhere along the path of success, they sowed the seeds of their own demise.

The question that I pose to you: how much of this is being driven by the systems that these big companies run? Or, stated differently: are the financial systems that underlie every modern organization in the world contributing to their own disruption?

The emergence of ERP systems last century was borne out of a simple problem — that organizations needed to be able to track the flow of financial information across a company. Inconsistent accounting standards and paper bookkeeping systems meant that executives didn’t have a timely and up-to-the-minute view of how a business was performing. As ERP systems proliferated and eventually saturated the market, this problem went away. It was simple for anyone in an organization to get a real time picture of the flow of dollars and inventory across a company.

In many respects, it was a revolution.

This data was immensely useful to management. Soon, they began to rely on it not just as record of performance, but as a system of management, too. Given the past we were coming from, where technology was not used in management at all, it was incredibly powerful. Management accounting systems gave tremendous insight into the efficiency of operations. Of the status of inventory. You could track revenue down to the dollar. And, perhaps most importantly of all from the perspective of executives — you could immediately see profitability — and the financial levers that impacted it.

But all this focus on the tracking of dollars in turn created another problem: myopia.

Peter Drucker once said, “what gets measured, gets managed”. With the emergence of an accurate system of measurement for the dollars, the dollars got managed. But there’s another Drucker concept even more important than that:

The purpose of business is to create a customer.

With the incredible power that these ERP systems brought to bear, and the analytics they unleashed, everyone increasingly focused on those outputs. This was the system of record. This is what we focus on. What occurs in the system is what matters. What occurs outside of it… well, it isn’t measured, and increasingly, it didn’t exist. The perverse side-effect was that organizations began to focus more and more on the flow of dollars, and the distinction between customers and profits in many businesses began to blur.

But while customers and profits might be correlated — they’re not the same thing.

Nevertheless, in this ERP-led world, when employees across an organization — particularly frontline employees — are given goals, or have their performance assessed, it often isn’t done in terms of serving customers. It’s done in terms of financial outcomes. And while this might be the conventional wisdom for how things are done, when was the last time you stopped to think about whether it’s the right thing to do?

A hint that it may not be came from one of the greatest CEOs of the last hundred years. In his biography, Steve Jobs, in explaining why Apple floundered after John Sculley took over, spoke on the dangers of taking a financials-first approach:

My passion has been to build an enduring company where people were motivated to make great products. The products, not the profits, were the motivation. Sculley flipped these priorities to where the goal was to make money. It’s a subtle difference, but it ends up meaning everything.”

To be fair, it’s easy to say that everyone should copy Apple and Steve Jobs; it’s also completely unhelpful. The fact remains that ERP systems exist for a reason: managing a multinational company with thousands of employees is extraordinarily difficult. What’s needed, then, is not a replacement for financial analysis but a new way of measurement — and management — that puts the ERPs, and the financials, in their proper place.

The question then becomes: What would such a system look like?

A strong hint comes from companies that are storming the world at present: Uber and Airbnb. They are revolutionizing their industries with systems that are tracking metrics of a very different nature than that of a traditional ERP system.

Was your ride a great experience?

How was your homestay?

It is entirely different being a customer of one of these businesses as a result. Whereas, from a systems perspective, a taxi driver is encouraged to focus primarily on the profitability of a fare, the priorities of an Uber driver are very, very different. Their first concern isn’t dollars. It’s with ensuring that the experience that you have as a customer is a good one.

Why is this?

Well, it’s not that Uber exists in a utopian world where money doesn’t matter. They still care about making money just as much as the taxi company does. The fundamental difference: one organization tracks measures relating to the flow of money and profitability. The other has that same system, but another as well: one to understand the quality of the experience the driver provides to the customer, and to measure that with the same level of granularity that many businesses track financial data. Uber then uses the data that system generates to manage individual drivers to be responsible for delivering on it. They don’t prescribe how the driver needs to deliver the experience; they just tell the driver that they need to deliver a great experience to the customer, and then ask the customer how the driver performed. In putting in place a system of measurement and management like this, they don’t just unlock a sense of entrepreneurship in their drivers, but also a shift in their priorities: to delivering experiences.

Put differently: Uber has built a system to ensure that they’re executing on their core mission as a company — which is not about making money. It’s about serving their customers.

It seems so obvious. But in many respects, this is an absolute revelation.

Many of you reading this today will be hearing about Medallia for the first time. The type of system that I described above — one where an organization can manage to its mission, rather than just its financials — is what we call a Customer Experience Management system. While Uber and Airbnb might have developed proprietary systems in order to do what they do, there are many organizations out there that wish to adopt such a system without having to develop it internally.

If you are in the position of wanting to adopt a system to like this — so that everyone, from your frontline staff to your executives, are focused on the customer, and not just the customer’s dollars — well, we have built the best one on the planet. And it’s why I’m so excited to be a part of this company.

To come back to where we started: on disruption, and how it relates to experience. My friend and Exponent co-host Ben Thompson has posited that part of what has protected Apple from disruption for so long has been a focus on delivering an incredible experiences. There’s a quote from Tim Cook that I want to call on to illustrate his point:

“We’re not focused on the numbers. We’re focused on the things that produce the numbers.”

If you’re the CEO of a company today, and you want to focus on the thing that produces the numbers, where are you going to get the system from that does that? If you’re Travis Kalanick, perhaps you might want to build it from scratch.

But there is a better answer to that question: Medallia. This is the first SaaS-based, organization-wide system that, rather than just focus on profits, truly focuses on what causes those profits in the first place:

The customer.

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Photo credit: Alberto Carrasco-Casado