CHAPTER 23

Stop Letting Quarterly Numbers Dictate Your Strategy

by David Hersh

In 2008, as the CEO of a software company that had just missed its target for the second quarter in a row, I was so intent on hitting our fourth-quarter revenue number of $8 million—and so scared for my job—that I promised the company I would get a tattoo of the number somewhere on my body if we hit it.

No single metric has more drama surrounding it than quarterly revenue. Make it, and you’re a hero. Miss it, and you may not have a job. But beneath the drama lies real danger. In my experience, nothing has done more long-term damage to promising young companies than focusing on quarterly revenue.

For public companies, the issues surrounding the “beat or miss” quarterly updates are well documented. Short-term scrutiny leads to short-term moves, activist shareholder shenanigans, and other tricks used to bump up the price of the stock. These pressures distract company leaders from the company’s long-term health.

But it’s not just the big public companies that fall into this revenue-focus trap. I’ve advised hundreds of startups and growth companies that feel the same short-term pressure. Their boards push aggressively on quarterly sales goals. And with only six to eight board meetings a year, most outside board members don’t grasp the big-picture strategy in the same way that the CEO does.

There’s nothing wrong with having a quarterly target; cash is the oxygen of a growth business, and it needs to be managed very carefully. But leaders, especially those who are still learning to navigate their market, must have a deep, unwavering focus on how they will win over the long run. Doing anything else is like driving across the country while looking only five feet in front of your car.

Here’s an example from an SVP of product for a once-promising $20 million software company:

We raised over $100 million in venture capital but were still figuring out a repeatable business model. We couldn’t learn how to make the model work because our strategic moves were always trumped by having to make the quarterly number. The CEO we hired was a bean counter who made the numbers reinforce his story, and the board bought into it, but it was a false story. The sales team was amazing, but it was too hard to sell because the product had no more differentiation or vision. Over time the company lost relevance in the market, all the good people left (myself included), and the potential acquirers were no longer interested.

In a scenario like this one, the sales team may respond admirably to revenue pressure, but their “do whatever it takes” mentality usually leads to chaos in the name of getting deals done. The result? You push innovation aside, compromise market positioning, turn the product into a dumpster of features, and create a trail of mayhem, making these deals successful postsale. And every subsequent quarter becomes increasingly difficult.

It doesn’t have to be that way.

While not every company can have a Jeff Bezos or a Steve Jobs who can keep the board focused on long-term vision, it is possible for CEOs and other leaders to have an enlightened conversation around strategy and to better manage unrealistic or misguided expectations from the board.

In table 23-1, you’ll find a few “canary in the coal mine” warning signs that the number has gotten too important and advice for avoiding the situation.

If you are a CEO or senior leader and find that revenue has become shorthand for whether the business is working, it’s time to change the conversation. In my experience, these are the four main ways to drive that change:

• Ensure that your strategic plan is still appropriate, clear, and embraced by the team. It’s often shocking to most leaders, but up to 95% of employees are unaware of, or don’t understand, company strategy.¹ Update the plan as needed and make sure it can be summarized in a short, clear statement that employees can express with confidence and energy.
• A McKinsey study found that only 21% of board members (public and private boards) fully understand the company strategy.² To get past this hurdle, meet with board members individually to delve deeply into how the company plans to win, but also spend time listening to each member’s motivations, ideas, concerns, and aspirations for the company. You need to build strong connective tissue between management and the board.
• Update the company dashboard around the key metrics that support the company’s long-term goals, and ensure those KPIs are aligned with the company’s purpose. Visually represent sales numbers as the result of strategic execution, not the goal.
• Keep the strategic communication and metrics flowing constantly, and celebrate the successes and course corrections that accelerate the strategy. Companies should be in a “flow state” where information is constantly available and is driving decision making throughout the organization.

Quarterly sales numbers are important, but they are also a deceptively comfortable way to manage a growth company. It can feel good to hit the number and pop the champagne. But leading with that number is lazy, a death knell for innovation and long-term success, and can disguise the real issues facing the company’s prospects. The biggest value creation comes from companies that know how to win over the long run.

Oh, and my tattoo promise? We did hit our number that quarter. And yes, I still have Roman numeral VIII on my ankle. I’m proud of that period of time, but if I were coaching a leader or CEO foolish enough to make the same promise, I would recommend a more inspiring, strategic image. And maybe start with a temporary tattoo.

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David Hersh is an entrepreneur, investor, and adviser based in San Francisco who writes about transforming startups into breakout companies. He was the founding CEO at Jive Software and now the CEO of Mobilize. Follow him on Twitter @djhersh.

NOTES

1. Robert S. Kaplan and David P. Norton, “The Office of Strategy Management, Harvard Business Review, October 2005 (product #R0510D).

2. Chinta Bhagat, Martin Hirt, and Conor Kehoe, “Tapping the Strategic Potential of Boards,” McKinsey Quarterly, February 2013, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/tapping-the-strategic-potential-of-boards.

Adapted from content posted on hbr.org, December 13, 2016 (product #H03C2S).