Jan 11, 2020 - 3 minutes read time
If companies can build believability with clear evidence, then trust will quickly follow
You can’t manage what you can’t measure. It happened like this. A chief executive saw that selling licensed software in boxes no longer worked. Revenue growth had stalled and was improved only marginally by a price increase. The user population didn’t grow, and they came to expect version updates after purchase. The chief executive’s solution was to transition the company’s revenue model from licensing, where users pay a fixed amount up front, to a pay-as-you-go monthly subscription.
Wall Street was not thrilled. If you take revenue over time against up front, they asked, won’t it hasten revenue’s decline further? Won’t subscriptions reduce margins? How would your sales team sell this stuff?
“The faster the earnings fall, the better off we are as a company and the better off you are as investors,” the company’s chief financial officer said, “because millions of people paying us every single month is very compelling from a revenue perspective.”
The first thing that fell the next day was the company’s share price. The market groaned. You can’t measure what you can’t describe.
Except, this company actually used a new set of measures. The finance chief laid out a clear target for future subscribers and introduced new numbers to watch: the revenue per user per month (ARPU) and the annualised recurring revenue (ARR). There were additional disclosures beyond what the conventional accounting standards (GAAP) required.
To give Wall Street the new story, the chief financial officer made numerous calls to junior analysts at Goldman Sachs and Credit Suisse so they understood the new set of metrics and could build their analyses outside of a strict GAAP-based valuation model and do it well for their boss.
Incomes did fall by 35 per cent next year. But in the three years that followed, the company’s overall revenue went from zero per cent to 100 per cent subscription fee, of which 70 per cent was based on recurring users.
The stock price grew at a rate of 25 per cent a year. The company – Adobe – became a casebook study that sparked similar transitions at Autodesk, Intuit and Microsoft.
“The supreme art of war is to subdue the enemy without fighting,” Sun Tzu says. And quite often, sending a signal of a major commitment can freeze competitors in their tracks or elicit support from business partners. Such a commitment is powerful because it binds an organisation to a future course of action.
An example of this occurred in the early 1980s when IBM publicly pledged to lead the personal computer market. Backed by large investments and the dedication of top-ranking executives to the PC business, IBM convinced software vendors to write applications for their machines. Hardware distributors were persuaded to reserve shelf space.
Still, believability doesn’t arrive overnight. And that had been the trouble for Adobe, at least initially. Many organisations may be too stupid or too blind or too languid to see the plain truth. Facts and arguments and slogans won’t be enough. There are people who believe that if they can just get through this, they can catch their breath and get things back to normal.
So what makes a commitment believable to outsiders? It requires the available evidence to be observable and demonstrable. The evidence does not need to be financially related. The most powerful evidence can be non-financial, especially when it demonstrates that the commitment that had been made earlier, whatever it may be, is now being implemented with rigour and discipline. Progress is made, traction is shown and momentum is sustained. What’s there not to trust? Measure what matters.
Outlast your competition and thrive in an ever-changing world
In Leap, Howard Yu, LEGO professor of strategy and innovation at IMD, explains how companies can prosper, not just survive. Leap identifies five fundamental principles that allow companies to stay successful in the face of such competition.
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