The "MVP" in Business

In sports, we often talk about an MVP (‘Most Valuable Player’). The letters M.V.P. make me think about how we can reduce the complexity of all organizations into a simple equation: margin x velocity x people.

Let’s break that down a little further. Before we do so, let's remind ourselves that all organizations are businesses. We know that corporations have to satisfy their shareholders, but non-corporate entities also need to ensure their income is greater than their expenses and that their assets are larger than their liabilities. A non-profit or not-for-profit still aims to make a profit — they just don’t pay taxes on their profits because of their social purpose.

So, coming back to our MVP equation: margin is how much you make after all expenses. Net margin is expressed as a percentage of revenue or in dollars. Whereas margin is how much you make, velocity is how many times you make it.

Velocity is a term in business we don’t often hear, but it can be expressed as speed, productivity, optimization, or utilization.

If you’re a manufacturing business, velocity can be measured by the speed at which raw materials are converted into work-in-progress and then into finished goods before being sold.

If you’re a retailer, it’s the ability to move inventory quickly. Remember, raw materials, work-in-progress, and finished goods tie up cash and increase the risk of obsolescence, damage, or theft the longer an organization holds onto them.

If you’re a service business, it's the ability to utilize labor in the most efficient and effective manner possible. You’ll often hear leaders of service businesses say, “People are our greatest asset.” Well, people are not technically assets from an accounting perspective — they’re really expenses, and any future obligations connected to them, such as pensions, are really liabilities. But we appreciate the sentiment. Service businesses primarily utilize human resources to produce organizational results.

Ideally, organizations want to be in the business of high margin and high velocity, whereas most businesses lean one way or the other. Some are high margin and lower velocity (as that’s part of their brand prestige), while others are high velocity and relatively low margin — like Wal-Mart.

People optimize margin and velocity — it’s people who produce margin and velocity.

Having a fully engaged workforce optimizes margin and velocity. If any of these three elements is failing, results are sub-optimal. Think about it — if there’s suppression on margin because of competition or an outdated product or service, the velocity (volume of sales) will decrease. If margin and velocity are down, it can be hard to attract and retain high-quality people. If the morale of the workforce is low, both velocity and margin will suffer.

Great organizations (regardless of entity type) are always trying to improve margin, increase velocity, and fully engage their people.

When it comes to the people part of the equation, organizations need to remember that the glue that binds people together is trust. Trust comprises character and competence. Character is who you are, and competence is what you do. If you’re a colleague or leader of high character and high competence, people will trust you.

So, MVP may mean ‘Most Valuable Player’ in sports, but in the sport of business, I believe it’s a good way for us to remember that all organizations are in business and that the complexity of commerce can be distilled into the equation we call margin x velocity x people.

I’m personally not big into tattoos, but if I were, I think I’d have ‘margin x velocity x people’ written over my heart. I think I’ll try the henna version first and see if Gaynor likes it before I go with the real thing!

Paul Butler is a Client Partner at Newleaf Training and Development (newleaftd.com) and can be reached at [email protected] or 661 288 1004.?

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