I recently had a very interesting conversation with Chuck Richards, the CEO of CoreValue Software. Chuck is in the business of helping private business owners evaluate what drives value in their business and where there are gaps that can be filled. He does this through his software product, which I use and highly endorse.
During our conversation Chuck told me profits have nothing to do with creating value. At first, I pushed back very strongly but in a very short time I realized he was correct. Profits are a result and not a leading indicator of creating value in a company.
Creating value starts with being tactically excellent. This requires that you look inside your firm and see if you are delivering our product and service in a predictable manner that your customers have come to expect. This is the first step in tactical excellence. You probably talk about exceeding your customers expectations, but before you get there, you need to make sure you are meeting those expectations.
Trust is built between clients and advisors by having a predictable relationship. If you are going to be late, you need to contact your clients and let them not only know you’re going to be late, but also what you’re doing to fix it. Without this you lose trust and the value of your firm drops like a rock.
The second level of creating value comes from strategic initiatives.
Tactical excellence is a given in a strategically great firm. The firms that create true value take advantage of strategic opportunities that are presented to them. These are typically things you can do that change your process of delivering service, the way you identify your clients, the way you innovate to provide high value services or finding a new benefit for a client that creates incredible value.
Strategic initiatives require focus and require senior management not only support them, but be intimately involved in their design and execution. The main reason I promote the concept of owners being operationally irrelevant in their business is so you have time to work on strategic activities that can drive extreme value in your firm.
Profits are important, but they’re a trailing indicator.
Back to my conversation with Chuck. Yes, profits are important. Without them most of us will run out of cash. What I learned from our conversation is that with a business that constantly creates high value, cash is often not an issue. It’s an issue with companies that are just barely getting by.
Think about what drives value in your firm. Is it your investment process? How about how you handle life changes with your clients? Or, is it the care that you show when you develop a financial plan? Or, the one I really like you’ve become an expert at your clients problems and know how to help your clients solve them better than anyone else in the world. All of these are ways you can create value that always leads to stronger profits.
Are you a firm that’s creating value or just struggling to meet payroll. If you’re struggling or not getting the value you want, think about examining what drives value in your firm. Then let me know what you find.