We need to renew the P&L! (People & Learning defeats Profit & Loss)

Last few weeks were rich in events: In Madrid, we spoke about the Brexit and the US/China trade war consequences with the Australian embassy, in Paris, we spoke about the Nigerian eldorado of this nation going to double in size (195M today to 400M people projected in 2050), in London, we spoke about startups going global and in Barcelona, we spoke about the future of work...

From these events, we spoke about growth, teams, organisations, CSR, competition and many more topics.

Through history, convergence of innovations always brought change. One of the key common element to all these events I have been reflecting upon is that the way we measure things need to change too in order to progress towards the right goals. And that speed or rather velocity matters.

I searched the difference between speed & velocity. Google replied:

“The short answer is that velocity is the speed with a direction, while speed does not have a direction.”

So let’s get to it and dig into adapting the old P&L (profit & loss) to what I think should be the new one People & Learn for the sake of the argument. 

History of the P&L

When I researched the origin of the P&L, I read this: 

Bookkeepers most likely emerged while society was still in the barter and trade system (pre-2000 B.C.)*

& reading further, you get this:

“The Mathematical Monk

Continuing in the tradition of monks doing high-level scientific and philosophical research in the 15th century, Italian monk Luca Pacioli revamped the common bookkeeping structure and laid the groundwork for modern accounting. Pacioli, who is commonly known as the father of accounting, published a textbook called "Summa de Arithmetica, Geometria, Proportioni et Proportionalita" in 1494, which showed the benefits of a double-entry system for bookkeeping. The idea was to list an entity's resources separately from any claims upon those resources by other entities. In the simplest form, this meant creating a balance sheet with separate debits and credits. This innovation made bookkeeping more efficient and provided a clearer picture of a company's overall strength. This picture, however, was only for the owner who hired the bookkeeper. The general public didn't get to see these records—at least not yet.”*

If DaVinci’s friend (Pacioli) writes this during the Renaissance, I find it very interesting to quote an Essay by Dr. Beth Harris and Dr. Steven Zucker which says: 

“Florence was a Republic in the sense that there was a constitution which limited the power of the nobility (as well as laborers) and ensured that no one person or group could have complete political control (so it was far from our ideal of everyone voting, in fact a very small percentage of the population had the vote). Political power resided in the hands of middle-class merchants, a few wealthy families (such as the Medici, important art patrons who would later rule Florence) and the powerful guilds.”*

That’s their geography & historical context. They measured things in an innovative way, at the time.

The business measure as we know it, is seriously impacted by the old trade, it got more sophisticated during the Renaissance and then big time again during the first big infrastructure projects during the gold rush years.

The investopedia article follows with this: 

“The American Railroad

The appearance of corporations in the U.S. and the creation of the railroad were the catalysts that transformed bookkeeping into the practice of accounting. Of the two factors, the railroad was by far the most powerful. To get goods and people to their destinations, you need distribution networks, shipping schedules, fare collection, competitive rates, and some way to evaluate whether all of this is being done in the most efficient way possible. Enter accounting with its cost estimates, financial statements, operating ratios, production reports, and a multitude of other metrics to give businesses the data they needed to make informed decisions.

The railroad also shrank the country. Business transactions could be settled in a matter of days rather than months, and information could be passed from city to city at a much greater speed. Even time did not run evenly across the country before the railroad. Previously, each township decided when the day began and ended by a general consensus. This was changed to a uniform system because it was necessary to have goods delivered and unloaded at certain stations at predictable times.

This shrinking of the country and introduction of uniformity encouraged investment, which, in turn, put more focus on accounting. Up to the 1800s, investing had been either a game of knowledge or one of luck. People acquired issues of stock in companies with which they were familiar, either by knowing the industry or knowing the owners, or they blindly invested where their relatives and friends encouraged them. There were no financials to check if you wanted to invest in a corporation or business that you knew nothing about. The risk of this type of investing made it an activity for the wealthy—a rich man's sport with the taint of gambling. This image has never completely faded.” *

Fast forward to 1999, here is what Bill Gates wrote:

Business is going to change more in the next ten years than it has in the last fifty. As I was preparing my speech for our first CEO summit in the spring of 1997, I was pondering how the digital age will fundamentally alter business. I wanted to go beyond a speech on dazzling technology advances and address questions that business leaders wrestle with all the time. How can technology help you run your business better? How will technology transform business? How can technology help make you a winner five or ten years from now? If the 1980s were about quality and the 1990s were about reengineering, then the 2000s will be about velocity. About how quickly the nature of business will change. About how quickly business itself will be transacted. About how information access will alter the lifestyle of consumers and their expectations of business. Quality improvements and business process improvements will occur far faster. When the increase in velocity of business is great enough, the very nature of business changes. A manufacturer or retailer that responds to changes in sales in hours instead of weeks is no longer at heart a product company, but a service company that has a product offering. These changes will occur because of a disarmingly simple idea: the flow of digital information. We’ve been in the Information Age for about thirty years, but because most of the information moving among businesses has remained in paper form, the process of buyers finding sellers remains unchanged. Most companies are using digital tools to monitor their basic operations: to run their production systems; to generate customer invoices; to handle their accounting; to do their tax work. But these uses just automate old processes. Very few companies are using digital technology for new processes that radically improve how they function, that give them the full benefit of all their employees’ capabilities, and that give them the speed of response they will need to compete in the emerging high-speed business world. Most companies don’t realize that the tools to accomplish these changes are now available to everyone. Though at heart most business problems are information problems, almost no one is using information well. Too many senior managers seem to take the absence of timely information as a given. People have lived for so long without information at their fingertips that they don’t realize what they’re missing. One of the goals in my speech to the CEOs was to raise their expectations. I wanted them to be appalled by how little they got in the way of actionable information from their current IT investments. I wanted CEOs to demand a flow of information that would give them quick, tangible knowledge about what was really happening with their customers. Even companies that have made significant investments in information technology are not getting the results they could be. What’s interesting is that the gap is not the result of a lack of technology spending. In fact, most companies have invested in the basic building blocks: PCs for productivity applications; networks and electronic mail (e-mail) for communications; basic business applications. The typical company has made 80 percent of the investment in the technology that can give it a healthy flow of information yet is typically getting only 20 percent of the benefits that are now possible. The gap between what companies are spending and what they’re getting stems from the combination of not understanding what is possible and not seeing the potential when you use technology to move the right information quickly to everyone in the company.*

The history of how we adapt the way we measure compared to the velocity of change is at the core of this article. 

The P&L as we know it today is no longer appropriate (or could be improved!) yet hundreds of millions of businesses still use it (which is also why concept such as BCorp are more and more popular*). It allows us to realize that accounting (as all functions of organisations) evolved slowly as convergence of innovations transformed the world we live in. It is not easy to step back from adopted norms and change them at scale.

It inspired the table below:

& a shorcut to what the P&L could look like in 2019:

So, after stating that the way we measure needs serious improvements, let’s have a look at: how come we got to an “obsolete measurement”. 

In other words, if we had our eyes, attention, focus & actions on the right data, if we were measuring “business” correctly and hence making better & faster decisions, would we have so many businesses struggling, underperforming or even dying? 

Why do so many businesses struggle as they grow?

The P&L was somehow innovative when created. It was a very logical outcome of mathematics lessons: I sell something (+), I have cost of sales to produce [say cars], I get a gross profit from which I need to deduct Opex (human “resources” working is part of them), I get profit before tax, I contribute to society (to build roads my produced cars can drive onto)... 

Following the desire to continuously improve, I need to increase sales & reduce opex to maximise profit because somehow, this has been agreed as the most important line.

The leader’s success is improved on his/her P&L performance.

It also created a global “problem” which initially was a good idea to improve mobility…! I’m not suggesting we should not innovate or invent the car. I’m saying we failed at looking at the bigger picture (the right metrics), engage with the right people at the right time. And doing so is complex, especially if the organisation is growing fast!

Why is this happening?

As an organization grows, it is becoming more and more complex to reconsider what is measured especially in a constantly changing environment.

Let’s compare to an athlete for a second: between games & seasons, they have a lot of time to reflect on their performance as a team. They can watch the video of their games, comment on them as a team. That time to think collectively is more limited in the current business world. There are more and more “corporate retreats” and companies such as Google introduced OKRs as an innovative way to measure performance & regularly review and adjust yet they still link their OKRs to an old P&L & balance sheet to match international financial standards. 

The impact of this financial framework on capitalism, consumption etc. is massive.*

So how could business have the right indicators to measure? 

First, founders/shareholders/managers/team members alignment. To get a high performing team, you need all its athletes / team members to be aligned. 

Keeping the sport’s analogy, you need both governance & top management (say board/founders, managers & team) coach and players to be 100% aligned. 

Much easier in sport than in the real world because the purpose (for the sake of the argument) is defined: winning. 

Back to a bit of history of winning: 776 BC, first Olympic games. Men only, the objective is to win. I’m often thinking: what would have happened if it was men & women and that objective had been to be as smart as a group as possible. More difficult to set, but what do 2 competing car manufacturers do today? What do 2 competing nations do today? We “compete” early (starting at school, still using students ranking for the vast majority) and this is perpetuated at work (sales ranking etc.).

So back to the leader / athlete and his/her own framework:

Number one resource: time. 168h per week in this illustration, 52 weeks in a year. X years.

The way business works evolved. From “one captain only can steer a boat” (army model with title such as chief executive officer”), we got to understand that a co-pilot can be useful when it’s risky or more complex.

Investors look at startups more positively when it’s co-founded than when it’s founded alone because they realised it can be a tough job for a single person during growth or scale-ups.

In any case, whether it’s to steer a boat, fly a plane, drive an organisation, alignment of the pilots (management) with the control tower (board/investors), the crew (team) & solid knowledge about the meteo (market) are needed. Miss one "element" (stakeholder) and serious trouble can occure. 

Same goes with business leaders. Say investors/board, managers, team & market.

If you align 3 of the 4 elements & miss one, turbulences ahead!

The more it grows, the more complex. The faster it goes, the more complex. Combine both (growth & speed) and you need to have a proper plan and dedicate the right amount of time to address how to manage the alignment of these "4 key elements".

So how to manage this complexity through time. Why not introduce an alignment metrics to discuss within your team? How aligned do you think we are as a team at this date? Dialogue & Q&A only “cost” time. Yet, I’d rather call it a strategic investment to be able to set the right metrics & make best use of resources accordingly. 

In order to enjoy the flight, apart from securing your seat belt, what is the right diet on board? 

Where should the emphasis be put? 

You’ve heard “Culture eats strategy for breakfast” right? I would rather say: market relevance (purpose/answering an actual need) requires to connect with the market, so requires relationships & relevant data. These relationships with diverse relevant stakeholders and data (acquired thanks to them) of the market can then turn a need into a business opportunity. 

Building an aligned team agile enough to remain relevant as the market needs change - in the right timing - is the key. Back to the “leader’s circles”, it becomes increasingly difficult to run a growing business and staying in touch with the market in the 168 hour week constraint! So building the right relationships and agree on where to focus our time-resource as a team and regularly checking alignment (investors-owners/founders/managers/team) seem to be a prerequisite for culture. As you cannot enforce culture. You can only adhere and/or create adhesion to a culture.

So: interaction, communication, relationships, forming a team to answer a need, checking alignment & consensus on areas of focus & time allocation and shape culture from there.

So culture doesn’t eat strategy for breakfast. The team needs a breakfast together to align on strategy, on values, on culture, on how to execute. I’d add that it’s usually a good idea to invite not only the team but also clients, partners to such breakfasts as their point of view will add value to the discussion!

So why do so many struggle at this? Why is it not easy? 

The more diverse the team, the better informed decision. If for a strategic decision, it’s only your team at the breakfast table, you will miss the point of view of your client & your investor. 

Yet, for a leader, asking his/her investor or his/her own clients what to do is not easy. Especially when we come from hundreds of years of not representing the leader as particularly consultative.

The king of the jungle did not consult the antilope from what we know (i.e: we are marked by the history of life as a confrontation, competition to survive). Once technology brings a certain advantage to humans, the very notion of competition needs to be rethought. 

Back to more diverse the team, the more more informed the decision: thankfully, this is evolving rapidly due to more and more research published on the importance of psychological safety & the importance of diversity for improved decision making.

Again with this illustration which I found great: what would have happened to our societies if since the Olympics, it wasn't about winning (running faster than the other) but about winning together (best collective time of all invovled in the race?). The long term focus would most likely be stronger.

We are anchored in a winning / power relationship model yet, we get to realize that effective decision making require groups of people. Even the army realized it: “permission to speak freely” is a moment during which hierarchy does not apply to allow people in the lower ranks to express their mind without fearing consequences. 

In sport, even when you grow the ladder, your performance as a leader in your field is scrutinized. In business, unless you have an effective governance in place, it is not the case again, impacted by the power models.

So back to the initial idea of a new P&L (people & learning):

Profit & Loss is like a race: + win, - loses. What if a cost is viewed as an investment? What if the entire P&L was about winning?

This article was triggered when artist Banksy launched its website https://grossdomesticproduct.com/ (check it out, it's worth it!) it made me think about these brilliant books by Joseph Stiglitz, Amartya Sen, Jean-Paul Fitoussi Country wealth & individual’s well-being & towards new ways to measure. 

10 years after Stiglitz, 20 years after Bill Gates’ book, 170 years after the gold rush, 561 after the double entry bookkeeping, we spoke about the new P&L & the impact of time and velocity in the way we measure things.

Only my opinion! What do you think about the above? Feel free to comment!

Taking the opportunity to thank all people who came to our recent event for their contribution to the discussion & brainstorming! I promised to those who could not make it I'd write a summary, it's now done!

*** Sources & notes:

* Great post from Investopedia quoted several times: https://www.investopedia.com/articles/08/accounting-history.asp

* Good discovery of the Khan academy: https://www.khanacademy.org/humanities/renaissance-reformation/early-renaissance1/beginners-renaissance-florence/a/florence-in-the-early-renaissance

* Amazing book, especially when you think about the date of publication...! Gates, Bill. Business @ the Speed of Thought: Succeeding in the Digital Economy . Grand Central Publishing. Kindle Edition. 

* From this sentence, I invite you to discover more about why there is a long waiting list to become a b-corp! https://bcorporation.eu/

* When we projected the new P&L during a recent event, we got to discuss robots replacing humans. Just as a thought provoking comment, I replied that back to a few hundred years ago, work was for slaves and working was badly perceived by society… Leading to the following comments: a) It may be time for some companies employing what I call “slaves 2.0” to think hard about their business model… for their own sake! & b) also to rethink the way we measure success. We are still looking at growth of number of employees as a possible success element. Is it a valid indicator to measure success?

* Couple of points after this sentence: "The impact of this financial framework on capitalism, consumption etc. is massive.":

1) First a quote from Sun Bear of the Chippewa Tribe (American indian) I do not think the measure of a civilization is "how tall its buildings of concrete are. But rather how well its people have learned to relate To their environment and fellow man"

2) 1972, the former king of Bhutan created the Gross National Happiness, or GNH in opposition to GDP. (so it's not a new concept!)

2 great books: 1) https://www.odilejacob.fr/catalogue/sciences-humaines/questions-de-societe/vers-de-nouveaux-systemes-de-mesure_9782738124630.php & 2) https://www.odilejacob.fr/catalogue/sciences-humaines/questions-de-societe/richesse-des-nations-et-bien-etre-des-individus_9782738124609.php

& last but not least, Banksy's website: https://grossdomesticproduct.com/!