Most companies rely on accounting systems that encourage short-term thinking over long-term.

A company’s future can be mortaged by failing to connect short-term actions with long-term results.

1. What are you paying attention to?

Work is a selection process. What tasks gets accomplished today, and what goes on “the pile”? Which projects do we staff, and which are on hold? Which initiatives will our company pursue, and which come later? These important decisions are often driven less by careful analysis than top-of-mind awareness. Put another way, decisions are based on what we are paying attention to. Consider this story relayed by Dan Adams:

“As a freshly-minted chemical engineer in the 1970’s, my night-shift foreman duties included testing a perpetual strip of rubber coming out of the die at the end of an extruder. If the rubber wasn’t right, I began checking what was going into the hopper at the front of the extruder. 25 Years later, as I sat through my umpteenth financial business review, it hit me: We were all watching the rubber come out and fussing with the extruder die… but no one was checking what was going into the feed hopper.”

Of course, it seemed like these reviews were intelligent meetings—discussing prices, margins, and growth rates. But these metrics had all been determined by the products Adams’ company had launched years earlier. If they had fed high-value new-product projects into the hopper, the meeting would be entirely different than if they had fed ill-conceived projects.

2. Consider four types of activities

It’s difficult for most firms to even differentiate between their efforts at the extruder die (observing short-term results) vs. the feed hopper (driving long-term results). Consider four types of activities:

1) observing short-term results  Example: reporting last month’s revenue by business unit

2) observing long-term results  Example: analyzing profit margins over the last 5 years

3) driving short-term results  Example: Increased travel to secure a new account this quarter

4) driving long-term results  Example: Hiring a scientist to help enter an attractive new market

A company’s financial accounting system does a good job measuring #1 (observing short-term results), and a miserable job with the rest. What about observing long-term results (#2)? Sure, the accounting system can look backward in time over several years, but it is totally incapable of looking forward… which is what really matters.

Doesn’t an accounting system measure the drivers of short-term and long-term results (#3 & 4)? It does, but it lumps the short-term and long-term drivers together, creating the illusion of insight where little insight exists. How much of this year’s sales budget focused on hustling today’s products vs. understanding market needs for future products? What portion of this year’s training budget led to near-term gains vs. skills for long-term growth? We seldom know: Short- and long-term drivers have been mingled and masked.

3. Beware of this wicked distraction

Paying too much attention to short-term accounting results is more than an innocent distraction. This is a “wicked distraction” because the drivers of short-term and long-term results are often in direct conflict. Executives eager for short-term results can pull many levers now that slow growth later: hiring freezes, travel bans, delayed training, under-resourced projects, distorted priorities. These levers are limited only by the executive’s imagination… certainly not by accountability from “accounting” systems.

This tension between short- and long-term is at the crux of many a firm’s downfall. Wrong-headed, near-sighted leaders can “harvest” decades of fine work by real “builders”… and look great in the process. They can mortgage the company’s future and demoralize its employees… all the while receiving plaudits from financial analysts. Sure, there will be consequences, but the healthier the firm they inherited, the longer this harvesting can continue. Sadly, the “lag time” between poor decisions and their consequences can be longer than the tenure of such leaders.

Most companies have not built sufficient safeguards against this. Their accounting system will not go away any time soon, given financial reporting, tax and regulatory requirements. Alongside this “financial” accounting system should be a parallel “growth” accounting system. In the same way that capital expenditures (which impact long-term growth) are put in a separate “bucket,” so should current-year expenditures that have long-term impact. Additionally, close attention should be paid to metrics that are known to drive long-term growth, e.g. rigorous assessment of pipeline projects.

Have you noticed the “lever of time” in your life? When steady effort is applied over time—learning a musical instrument, accumulating a financial nest egg, building a sound reputation—remarkable things can happen. Imagine if this lever of time was consistently applied to building a business of increasing value? Certainly impressive results would come from this “constancy of purpose” (to borrow from Dr. Deming’s first of 14 points). 

New Product Blueprinting: The Handbook for B2B Organic Growth Page 6, 26.

Q1. Don’t we need to pay attention to the short-term so we can “get to” the long-term?

Of course. We’re not recommending inattentive or sloppy near-term management practices. But, unless your company is in a short-term survival crisis, it’s unlikely that heroic efforts are required to maintain decent short-term performance. If you put your best thinking, talent and time into shaping future years, not weeks, you’ll greatly leverage your efforts. 

Q2. How might a parallel “growth” accounting system work?

Consider pharmaceutical companies: Because their new product pipelines are relatively transparent to the investing public (given drug testing regulations), a drug trial success or failure directly impacts their valuation. Develop a model of economic benefits flowing from your new product pipeline. Then for instance, you’ll be able to project the impact of boosting the probability of success or delaying the launch date. Perhaps the short-term benefits of a travel freeze won’t be so attractive when compared to the (usually significant) impact of project delays.