The new ROI for CEOs — Return on Attention and Return On Management

HBR

In a McKinsey survey, the consultancy group found that large companies are poor at managing “return on attention”.

“In our experience, many companies are more comfortable analyzing and debating than they are acting decisively and intuitively. Their default orientation toward more and better information binds and restricts their ability to move surely and quickly.”

Return on attention is the generated revenue by giving attention. In the modern economy and new media, the interest of the potential customer is becoming increasingly difficult with money. Advertising, buying attention and (indirect) sales are slowly becoming less effective and sometimes even as spam.

The success of a product or company is increasingly determined by the attention it deserves. One theory is that you can create more attention and appreciation by giving attention. To earn attention, a company must protrude above the ground level. For example, with excellent service, communicating in an innovative way or by offering a unique proposition to your customers.

Harvard Businees Review recommend that managers use a new business ratio. They call it return on management (ROM), and it can be expressed as the following equation:
Return On Management(ROM): An Equation

=Productive Organizational Energy Released/Management Time and Attention Invested

If managerial energy is misdirected or diffused over too many opportunities, even the best strategies stand little chance of being implemented and translated into value.

Like, return on equity and return on assets, ROM measures the payback from the investment of a scarce resource—in this case, a manager’s time and attention. It indicates how well managers have chosen among alternative courses of action to deploy that resource optimally.ROM measures the payback from the investment of a company’s scarcest resource—manager’s time and attention.

An example of how ROM works:

Consider two companies. The first is a small Boston-based consulting company—let’s call it Automation Consulting Services—that started out with a clear strategy of specializing in industrial technology.1 The company grew quickly off the base of its expertise and soon expanded to four offices. But seven years after its founding, the company was in a severe crisis. In one of the offices, staff were discovered to be cross-charging clients to meet budget requirements. In another office, management had failed to detect a drop in the amount of business generated by three of the company’s largest auto-manufacturing clients, which was leaving much of the professional staff idle. In a third office, an excursion into the uncharted waters of automating a client company’s library had resulted in financial losses and embarrassment as the consulting company realized that it did not possess the skills to deliver on the contract.

Simply put, the company had come undone. Managers were spreading their energy over too many projects, clients, and goals with no sense of priorities. At one time, the company had possessed a sound and focused strategy: growth through providing clients with state-of-the-art industrial technology. But managers had allowed the many opportunities facing the business to disperse their efforts away from implementing that strategy. As a result, the amount of productive organizational energy released was extremely low, but the amount of management time invested was very high. The company’s ROM was dismal.

By contrast, Automatic Data Processing (ADP)—a large database-processing company, headquartered in Roseland, New Jersey—provides a clear example of a company in which managers understand the value of focusing their energy around the projects that directly serve the company’s strategy. By using a strict checklist to assess whether projects are consistent with the company’s strategy and by clearly communicating a list of the company’s priorities, ADP has achieved 143 consecutive quarters (make that 35 years) of double-digit, earnings-per-share growth—a record unmatched by any other company traded on the New York Stock Exchange. Not surprisingly, ADP’s ROM is sky high.

At ADP, for example, managers use a checklist that identifies which business opportunities are verboten. It covers every strategic base:

Financial. No opportunities that cannot generate $50 million in annual revenue.

Growth. No opportunities that cannot generate at least 15% continuing growth rate.

Competitive Position. No opportunities where ADP cannot be first or second in the market.

Products. No new products that cannot be sold on the mass market, that cannot be mass produced, or that do not offer consistently superior direct-client service and performance features.

Sustained Market Position. No opportunities that do not put products or services in a very distinctive position, that do not include plans for adding a significant number of new clients, and that do not offer a high payback for clients.

Microsoft CEO Bill Gates is similarly unequivocal about setting strategic boundaries: “To be very clear, we are not going to own any telecommunications networks: phone companies, things like that. We’re not going to do system integration or consulting for corporate information systems. We love to write software, but there are exceptions. You won’t see us doing applications like small-business accounting. That’s a nice area for some people, but not for us. Computer-aided design and engineering? We won’t be doing that.”

Harvard Business Review has suggested that most companies could significantly improve their ROM if they applied the five acid tests.Await for my next blog to understand these five acid tests or directly jump to following link.

Good Luck!

Ref:
https://hbr.org/1998/01/how-high-is-your-return-on-management

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