The Cost of a Dollar

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I read an interesting statistic the other day.  The Harvard Business Review‘s latest edition reprinted The Secrets to Successful Strategy Execution (Neilson, Martin, and Powers, 2008), which states:

Our research shows that 61% of individuals in strong-execution organizations agree that field and line employees have the information they need to understand the bottom-line impact of their decisions. This figure plummets to 28% in weak-execution organizations.

What came right before that statement was the following:

Rational decisions are necessarily bounded by the information available to employees.  If managers don’t understand what it will cost to capture an incremental dollar in revenue, they will always pursue the incremental revenue.  They can hardly be faulted, even if their decision is—in the light of full information—wrong.

Companies have folded for this.  Anyone who has been in sales recognizes the “whatever it takes to close” mentality.  We’ve all been there.  You ask yourself, “Can I sell this for that little?”  Unfortunately, the answer was “no” but because you didn’t definitively know that, or your manager didn’t, you probably sold at that price anyway.

Communication, friends, is vital.  And direct communication is better than going through a middleman in the heat of a negotiation.  For example, if the customer says, “Can you add this widget for that price?”, you don’t say, “Let me ask my manager,” then leave the room with your cell phone to call your manager (or pretend to call if you’re one of those salespeople).  What if you actually said, “Let’s call the engineer who would have to do the work and ask him?”

And you get the engineer up on video with the customers, where they can see his face, and ask, “How much work would it take to add that widget?”

When he replies, “About four months,” you can think to yourself, “What’s four months times his monthly salary?  Uh, subtracted from the sales price?  Minus the materials?  Ouch!”

Believe me, explaining that math to the customers will make sense to them, too.  They’ll probably skip the widget.

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