Archives for posts with tag: Accounting

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I just attended a media conference. And I was shocked to realize that the digital industry is still stuck in the old accountability paradigm. Our standard ROI measure is still the difference between the cost of the campaign and the cost of reaching the same number of people in more conventional media.

That is not return on investment. It’s the kind of measurement that lead us almost to the financial abyss.

It’s silly accounting, just like the CDO’s, the derivatives and the other financial instruments that almost turned our economy into a barter society. The only metric that should count is the incremental profit that your marketing executions generated for your business.

Instead, we focus on silliness like click throughs, cost per impression, cost per action, page views, unique views, engagement rates.

Incremental Profit.

It seems to be a real challenge for marketer to measure incremental profit. Or, maybe they just focus on the wrong metric, on things that make no sense but can be aggregated fairly quickly.

I know, it’s hard to measure incremental profit. But it’s only the admission ticket to the big boy table, to talk business to the CEO. And not bright, shiny objects with the Marketing Manager.

Blame the addiction to accountability.

Accountability sounds great, doesn’t it? You can explain each penny you invested for your client, you can show wise use of the budget and explain what happened with all his money. It’s also a good way to show the client that you’re so much better in investing money compared to the other, wasteful agencies. The sad truth is that what you measure makes no difference. You’re just measuring efficiency, not the impact of advertising. That’s why we’re in this spiral of cheaper and quicker and more efficient. The race to the bottom, the race to the be the next forgettable commodity.

I’ve never met a CEO who cares how you spent his money.

They care if marketing has an impact on the bottom line. Did it make the business more profitable? Did it grow the business? Digital Marketing needs to get out of that hole (we all dug ourselves) to focus on efficiency. It’s about impact.

Here’s a question for you: Would you rather have no money wasted, deploy the most efficient campaign but have little impact? Or, would you rather waste 90% of your money, but the remaining 10% grow your overall business by 20%?

Exactly.

Nobody says you should waste a dime. But the addiction to accountability creates silly communication vehicles (ahem….Zynga) and burns so much money for clients, it’ s tragic. We develop brand fluff on all these social platforms and pointless display ads to make it even worse. Highly measurable, Excel spreadsheet adoptable and totally useless.

If you think that’s okay, keep on trucking. But, don’t expect anyone to take you seriously for one second. The real game is in changing the future of a brand, improving the balance sheet of a company. For that, we need a measurement intervention.

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Image: Courtesy of waxinandmilkin

For the sake of scaling, enterprises tend to create internal service divisions that are bureaucratic and monopolistic: Accounting, Procurement, R&D, Human Resources are usually run as subsidized monopolies. The pool that pays for their services is covered by an overhead charge imposed on the units served.

In general, subsidized monopolies are generally insensitive and unresponsive to the users of their services, but they are sensitive and responsive to those who subsidize them. Subsidizers are often not users of the service, hence less aware of the services’ deficiencies from the users’ point of view. In addition, bureaucracies try to ensure their survival by becoming as large as possible; they operate on the (not unreasonable) assumption that the larger they are, the more important they are and the more difficult they are to eliminate.

Centrally controlled corporations stimulate the increases in costs of internally provided products and services because the supplying units do not need to compare their costs and prices with those of external suppliers. How can you value a subsidized internal unit? It’s impossible. In a market controlled enterprise, users, not subsidizers, evaluate suppliers and express their evaluation in a way that counts – by their purchases.

As organizations of any kind become larger and more complex, the ability of centralized controllers to know all they need to know to manage their organizations effectively diminishes. Thats’s why an enterprise based on market economy works better in large systems: it disperses economic control among many enterprises that must compete with others in order to survive. And survival requires meeting or exceeding the expectations of customers and consumers.

Market Enterprise

A few requirements are important for an internal market economy to work within an enterprise:

  • Every unit within the enterprise has to be either a profit center or a cost center that is part of a profit center that is responsible for the cost center’s performance. Profit Centers are not always expected profitable but they have to be accountable.
  • Profit Centers have the freedom to buy any service or product they want from whatever source they want, and to sell their outputs to whomever they want at whatever price they want or are are willing to accept.
  • A corporate unit that reduces the value of the corporation shouldn’t be part of it no matter how profitable it is when looked at separately. For that reason, the enterprise has the ability to intervene in a unit’s purchases and sales bot only when it benefits an organization as a whole.
  • If there any executive reasons to buy services from internal resources even though outside suppliers are cheaper, the executive can force the unit to buy from within but has to pay the difference out of his own unit’s budget. This means that a selling unit will never have to sell its output at a price lower than it wants to and can.
  • A manager doesn’t tell his or her subordinate units what to buy and sell unless a negative effect on other parts of the corporation or the corporation as a whole can be perceived.
  • The executive units receives income from two sources: a) it charges for the operating and investment capital it supplies to subordinate units b) it imposes a tax on the profitability of each unit.
  • Each profit center can accumulate profit up to a certain level that all stakeholders agreed on. Profits in excess of the specified amount will be passed up to the corporate level for its use.

Why a market enterprise?

Every enterprise unit operating within an internal market economy becomes a profit center. Therefore, for each unit the same success metrics can be applied. It allows managers to hone their skills better since they have a lot of autonomy and it gives each stakeholder an opportunity shine. Managers will be more concerned to get all the information they need to run a profitable unit and offering that information to other units to improve interactions.

The biggest challenge in implementing this system is the tendency of managers to withhold information. They fail to see that empowering all stakeholders might decrease their stranglehold on information and power but, at the same time, empowers all stakeholders to run a much more profitable organization. And an organization everybody is invested in. It is often recommended to remove managers that are more concerned with their own power base and not the overall health of the organization.

These managers often form connections with units that are unable to compete effectively or are no longer needed in the enterprise. While dealing with these challenges, the enterprise should never forget that without converting to a market enterprise, the whole organization might become extinct.

In the next installment, we will talk about organizational structures.

Previous installations can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7, Part 8.