A Lever That Won’t Break
Posted by Mark Bennett on June 29, 2010
The Power of Pull covers a lot of interesting ideas about new ways to look at business and work, but one thing it brought up that I thought was very insightful has to do with levers.
Levers are a very handy tool and we use them all the time without thinking very much about them. If you’ve used scissors, nail clippers, tweezers, a crowbar, a hammer, or a wrench, you’ve used a lever. You push, squeeze, or pull a lever and you can now lift something heavier, cut something tougher, or turn something tighter than you normally could.
Sometimes though, if you push, squeeze, or pull too hard trying to lift something too heavy or cut something too tough, the lever can break. Cut something tough with cheap scissors and they break. Try to lift too heavy a boulder with a cheap or rotting 2×4, and it snaps.
Levers in Business
Debt is a kind of lever for business – with some of your own money and by also taking on debt, you can control more assets than with just your money alone. If you’ve ever put money down on a mortgage you’ve used debt as a financial lever.*
So, businesses use debt as a lever to create more value than they would without the debt. Well, as we’ve seen during this recent economic crisis, financial levers can break, with some pretty nasty consequences.
What if there was another kind of lever we could apply in business that didn’t break? What if it actually became stronger the more you applied it?
The lever that won’t break is Talent. Talent can actually become stronger when it is applied to a challenge, provided the company knows how to turn that challenge into an opportunity for collaboration and development.
Talent is a lever when it collaborates to overcome the challenge. When your talent collaborates, people are gaining the benefits of each others’ knowledge and experience without having to “go it alone” and figure it all out themselves.
As a result, the company creates more value than if people didn’t collaborate. In addition, the collaboration results in more development of the talent than otherwise would have occurred without collaboration.
Collaboration and the “Why”
But the collaboration I’m talking about is not just things like simple process decomposition. It’s more than just task breakdown, with people performing their particular piece so some larger thing gets done.
It’s also more than people or teams simply exchanging information about facts and figures, plans and forecasts, process steps, etc. – that isn’t what I’m talking about either. You can write that kind of knowledge down and most of the time someone can pick it up and use it without ever having met you or discussed it with you.
The knowledge we’re talking about is the deeper knowledge of “why” – why we are doing something, why something works better one way versus another, and why something is important to consider. This knowledge can only really be exchanged or shared through a deeper level of collaboration.**
Talent, when it collaborates at that deeper level to achieve a shared purpose, provides capability leverage. Because now your company delivers more real value from your employees collaborating than if they had worked alone.
To reiterate, Talent that collaborates is the company’s lever.
And this is a lever that won’t break.
* (Finance background) Financial leverage in a nutshell is the notion that you can reap larger returns on equity if you borrow at a lower interest rate than what your investment would return normally. You would borrow funds and you use those funds to increase assets (e.g. build a factory) or reduce outstanding equity (e.g. do a stock buyback.) In business, leverage, and its impact on return on equity (ROE), is represented by the (assets/equity) term in the famous Du Pont analysis equation:
(net income/equity) = (net income/sales) * (sales/assets) * (assets/equity)
You can see that increasing the ratio of assets to equity (by increasing debt), increases ROE (net income/equity).
So why not “leverage that sucker to the max”, you ask? That indeed is what financial institutions do – they are typically very highly leveraged. But what’s missing in the Du Pont equation is the notion of Risk. A company’s return on assets, i.e. (net income/assets) is never certain and if it falls below the interest rate far enough, long enough, or for debt levels large enough, the company can go under (i.e. the financial lever snaps.)
** (Epistemology background) This is the difference between “tacit knowledge” vs. “explicit knowledge.” “Tacit knowledge” is very hard to just write down and have somebody else just pick up and really “know” it. For example, designing complex machinery, riding a bike, or making that perfect soufflé all require things such as: time, teaching, practice, or mentoring. You often need a deep level of collaboration to transfer that knowledge, or at least to make it happen faster. “Explicit knowledge” doesn’t need that collaboration nearly as much. For example, the elevation of Denver, the recommended torque for an engine bolt, and the process steps for turning on the air conditioner are all fairly straightforward facts or processes to communicate to others.
Photo by hans s
This entry was posted on June 29, 2010 at 9:45 pm and is filed under collaboration, development, finance, pull, social network, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.