Raj Khera hardly ever said no. Almost anybody who wanted a Web site developed could call Khera Communications Inc. in Rockville, Maryland, and be pretty sure Khera would take the job. "I didn't like turning down business," explains the president and co-founder of the 3-year-old company.
But no more. Last November, Khera began saying no to clients who wanted personal Web sites. In fact, anyone not likely to buy $5,000 per year in services gets the nix. "Our larger clients are repeat customers, and we can make more money from them," Khera says, reasoning that marketing costs are identical for corporate and individual clients.
Khera's actions have resulted in a 25 percent sales gain in the first six months since he began rejecting opportunities that didn't fit his new strategy. His success illustrates the power of a new business benchmark called return on management, or ROM.
According to Robert Simons, the Harvard Business School professor who first recognized and studied the concept, ROM aims to give businesses the maximum benefit from one of their scarcest resources: management time. A primary goal is to keep entrepreneurs from being distracted from their core business by substandard opportunities.
ROM is similar to financial measures such as return on equity, but it deals with communication and focus, in addition to sales and profits. Simons explains the concept like this: ROM equals the amount of productive energy released, divided by the management time and attention invested.
High-ROM enterprises include Microsoft, Intel and Automatic Data Processing (ADP), according to a recent Harvard Business Review article by Simons and graduate student Antonio Dávila. At ADP, Simons says, a short checklist of tests for sales potential, market share and competitive positioning guides every new opportunity pursued. ADP's high ROM has helped the database processing company post earnings gains for 35 years straight, Simons notes.
Mark Henricks is an Austin, Texas, writer specializing in business topics.
Put It To The Test
Simons suggests five tests to see if your ROM is roaring or receding. First, does your organization know what opportunities are out of bounds? Having a mission statement isn't enough, says Simons, because mission statements are usually too broad. It's more important to identify opportunities you can't pursue rather than ones you can, says Simons.
You should also assess whether you have faced the fear of failure. One trick: Look five years ahead and imagine you've failed. What went wrong? This will help you identify opportunities to avoid, Simons says.
Next ask yourself, Are managers able to easily remember the key measures they're held accountable for? Simons suggests assigning no more than seven measures per manager and limiting them to concerns that will make or break the company.
The fourth test: Are you drowning in paperwork? If reports and budgets are taking on lives of their own, you're probably not spending enough time making critical decisions, Simons says. He suggests you request reports only when things go wrong. Otherwise, let the company run on autopilot.
Finally, ask employees what they pay attention to. If it's the same things that keep you up at night, fine. If not, your ROM is probably lower than it should be.
One way to increase your company's ROM is to seek out and destroy ROM-lowering traits. Simons and Dávila have identified five ROM-destroying business practices which are related to the test questions above.
A "sky's the limit" strategy is one sure sign of a lack of focus and, consequently, low ROM. Similarly, if you're tracking too many performance measures (such as customer satisfaction and market share), that's another sign of trouble. And if people don't know which performance variables they're accountable for, that's yet another enemy of ROM.
Has creating reports become a goal in itself? Beware, says Simons, because another sign of a ROM that's not as high as it should be is the failure to control planning and budgeting. Finally, if employees don't know what your company strategy is, ROM suffers. No matter how well you manage yourself, a failure to communicate goals to others limits your ROM.
ROM also has some reliable allies that help raise it. Clarity about strategic boundaries is one. This means everyone in your company knows what types of opportunities are off-limits. It also helps if key performance variables are widely known and understood, which means there can't be many. And when reports, forecasts and other paperwork are only prepared if they add to the bottom line, that's another ROM ally.
Ups And Downs
ROM may resemble financial measures, but it has its differences. For one thing, it's neither quantitative nor precise. Entrepreneurs must make intuitive estimates of whether employees know what's important, whether managers are focusing on the proper opportunities and so on.
Lack of precision and certainty means you take ROM with a grain of salt. For instance, Khera doesn't apply the same standards to existing clients as he does to new customers. He'll break rules in some instances, like the time a small branch of the Department of Agriculture inquired about a job that didn't meet Khera's new criteria. "This is part of a huge government agency," says Khera. "Because this could lead to a lot of other work down the road, we accepted it."
There's also a risk you'll focus on the wrong measures or, worse, the wrong opportunities. Jeff Gonyo, managing director of Wind Point Partners, a Chicago private equity investment firm that applies ROM-like measures to the companies it invests in, says, "You certainly want them to stick to their [objectives,] but if they're not working, you have to change them."
The risk of inflexibility may be a bigger problem for entrepreneurs than for established companies, simply because it's more difficult to determine whether an opportunity is a good one or bad one. "When you're creating a new industry, there is no right or wrong," notes Gonyo.
But ROM has appealing characteristics. Simons points out that you don't have to go to seminars to learn it, train employees to do it or hire consultants to implement it. You just have to make up your mind. "A lot of ROM is just understanding the importance of discipline and consistency in communicating your agendas," says Simons.
At Khera Communications, making the decision to focus on fewer opportunities has given Khera the gumption to turn down business that was distracting him from better opportunities--and the move has paid off. "The first few times [we turned down work,] it was painful," he admits. "But we had to make a decision and stick to it to see if the process works. And I'm glad we did. It's not painful anymore."
- "How High Is Your Return on Management?" by Robert Simons and Antonio Dávila, in Harvard Business Review, January-February 1998
- "Control in an Age of Empowerment" by Robert Simons, in Harvard Business Review, March-April 1995
- Levers of Control by Robert Simons (Harvard Business School Press)
Wind Point Partners, (312) 255-4800, firstname.lastname@example.org