Author: Anthony K. Tjan

Boards, managements, and employees waste far too much time due to a lack of clarity in conveying and sharing what it is they are trying to accomplish. The basic task of defining goals and keeping score is so critical, yet not accomplished frequently or consistently enough. Even when we think we’re communicating well, our perception of the clarity and impact of our message often outstrips the reality. Are your people nodding with understanding, or are they nodding with the look of a dog in front of the television?

Try this exercise: ask two or three board members or employees what the top three priorities are for the company. Then ask them the underlying activities or metrics best used to measure those priorities. See how consistent the responses are — or are not.

How to do better? You need first to commit to setting your top priorities, tasks and metrics [the content]. Once that is done, you need to commit to the using the most impactful possible means — usually with a strong visual element — to communicate those items [the form]. It’s simple: Prioritize, then visualize.

1. Prioritize. Be crystal clear on your top three to five goals. Fewer than three likely means you are not driving hard enough. More than five means you are diluting yourself and others. After that, establish the critical tasks required to achieve those goals AND identify the right metrics and benchmarks to know if you are getting there. Priority-setting is not enough if it lacks concrete and common measurement yardsticks, because people end up having divergent visions of success.

2. Visualize. The output of a process of priority setting, task management, and benchmarking often becomes so complex that it hampers effectiveness. Ironically, the proliferation of new management and measurement tools can make things worse. These tools usually are built on the assumption that all users are similarly competent and diligent in inputting, sharing, and reviewing data. How often do you really read and digest the “number reports” and “task updates” you receive? That’s why I rely more on a very basic system: Green, Yellow, Red, or GYR.

No joke — I have painted my business world green, yellow, and red. From simple task lists and project activity updates to scorecards for financial performance, everything is coded in green, yellow, and red. Most of the time, these are in Excel. Because of the ease in which they can be created and understood, I use them as my most frequent management communication tool. The easier something is to visualize and digest, the more likely it is to be understood and used, and few things can be easier than green, yellow, and red.

GYR task sheets sort the most critical information with simple GYR status — green meaning good, yellow watch-out, and red alert. You probably already knew that, of course. Our minds are well-trained to understand what those colors mean.

Here is an example of a typical task sheet/project plan without GYR:

Here is the same in GYR form:

That makes the priorities a bit clearer, doesn’t it? Or look at the flash report card that we use to measure the progress of a retail business in which we are invested (the numbers have been changed):

This is an overall scorecard that the CEO uses to measure progress against her number one priority. The organization is clear, first with the metric (revenue per square foot, year-over-year growth, etc.), followed by the benchmark (researched across the industry), and finally the stores’ performance.

Perhaps the greatest value of GYR management is that it allows you to really do exception-based management. As humans we like to focus at least as much on what is going well as what is going badly — which plays out in overly comprehensive updates to our teams and managers. GYR forces you to focus instantly on things that are not on track. It’s a system and process to acknowledge the good stuff, but spend the majority of the organization’s time on the things requiring work. It also encourages more frequent interactions and transparency across the organization.

We are in an era where we are overwhelmed with information and underwhelmed with insight. GYR encourages a discipline of high-quality communications defined by simplicity, relevancy, frequency, and transparency — the path to insight.

Growth. In my world of venture capital, we hear all the time that growth drives value. It is how some investors justify putting sky-high valuations on companies that are growing, but not yet making any money. Consider Zynga, which lost $209 million in 2012 — but is still valued at about $2 billion because of the cash it raised and because its revenue is still growing. On the other hand, there’s Groupon, once lauded as the “fastest-growing company ever.” Its stock price peaked weeks after the company went public in 2011 and is down about 80% since. The market has come to question whether its growth can be sustained, and with what underlying earnings.

Focus on growth and growth alone is always a temporary strategy. Over time, a company’s value becomes a function of both growth and cash flow. Superior earnings eventually lead to superior value creation.

Put another way, quality (i.e. sustainability) of revenue matters as much as quantity (i.e. growth) of revenue. High-quality revenue has three main characteristics: predictability, profitability and diversity. So in addition to looking at year-over-year growth, you should be looking to these three metrics to drive long-term value:

1. Predictability. What is your predictability metric? That is, how much of an “annuity” does your business model have? This is best measured by counting your customers from last year, and seeing what percent of them remain customers this year. For example, if you had 1,000 paying customers in 2011, how many of them were still with you as paying customers in 2012? At our venture firm, we look for companies that have the potential of getting to 90% of their customers returning year over year and spending at least the same amount or more. With that level of recurring revenue, your product has gone from “good-to-have” to “must-have.” The client-recurrence count year over year (or its inverse metric, churn), along with a measure of whether those recurring clients are spending at least the same amount in aggregate (recurring dollars), are the best proxies for predictability of revenue. It’s always easier to forecast if you can be confident that 90% of last year’s customers and dollars will be back this year.

2. Profitability. Where does your profit really come from? A company’s earnings are the sum of many different revenue streams contributing different margins and by extension different profit streams. At a fast-food establishment, for example, a fountain drink is likely a key profit driver relative to other elements of the meal. Or take giant online retailer Amazon. It makes its money as an e-commerce giant by selling goods, right? A closer look would show that the majority of its profits come not from e-commerce sales but from its third-party marketplace, media, and growing web and cloud services. Unpack your profit margin to see where you really want to drive your sales — to higher-margin areas. A practical approach is to divide your revenue into higher-margin and lower-margin categories. What is a benchmark for a good margin? It obviously varies by sectors — for example, retail businesses will have lower gross margins than SaaS (Software as a Service). We like business models that can generate gross margins of over 70%.

3. Diversity. When we evaluate companies we look closely at revenue concentration. While early-stage companies may often have a couple of customers that make up a large portion of revenue, over time you want to build a diverse revenue base. In general, we urge companies to ensure that none of their top five clients makes up more than 15% of revenue.

So there you have it. It’s a simple enough framework, but often difficult to achieve. High-quality revenue requires predictability, profitability and diversity. Do you have highly predictable revenue with high gross margins and without revenue concentration? Growth fueled by low-quality revenue can be exciting, but it eventually fizzles out. For the long run, as with most things in life, high quality is the way to go.