In sports, we’ll often talk of a Most Valuable Player, or the MVP.
The letters MVP make me think 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 organization are businesses. We know that corporations have to satisfy their shareholders but non-corporate entities also have to ensure their income is bigger than their expenses and their assets are larger than their liabilities. A nonprofit or not-for-profit still wants 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 phrase 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 at the speed in which raw material is converted into work-in-progress and then into finished goods and then sold.
If you’re a retailer, it’s the ability to move inventory fast. Remember, raw materials, work-in-progress and finished goods tie up cash and heighten the risk of obsolescence, damage or theft, the longer an organization holds onto it.
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 rhetoric. Service businesses are primarily utilizing human resources to produce organizational results.
Ideally, organizations want to be in the business of high margin and high velocity, whereas most business lean one way or another. Some are high margin, lower velocity (as that’s part of their brand prestige), whereas some businesses 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 reduce. If margin and velocity are down, it can be hard to attract and retain high-quality people. If the morale of people is down, velocity and margin will suffer.
Great organizations (regardless of entity type), are always trying to improve margin, increase velocity and fully engage people.
When it comes to the people part of the equation, organizations need to be reminded that the glue that bonds people together is trust. Trust is character and competence. Character is who you are. 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 of us remembering that all organizations are in business and that the complexity of commerce can be distilled down into an equation, which we call margin x velocity x people.
I’m personally not big into tattoos, but if I was, 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!
