Profits and Ethics: Partners in Success

 

     I am going to start this blog with something I know is not true -- but, since I WANT it to be true, I will make it my postulate.

All companies want to do GOOD in hand with doing WELL.

     Doing good makes a positive impact on the community, society, the environment, and every aspect of life you can think of. Doing well involves making the company a commercial success.

     The way our economic systems are structured, it is easy for a company to turn away from the path of trying to do good in order to do what appears to be the most profitable process. The "bottom line" is the result of adding all kinds of numbers and projections together, subtracting costs, adding income, getting interest from positive cash flow, etc.

     In such a situation, it is easy to say "if I increase my costs, I will decrease my profits". Increase the number in the spreadsheet and it will give you the number you are expecting. So, doesn't that prove that your surmise is correct? Yes -- but only if all the numbers are completely independent of each other. There are usually dependencies among the numbers but they aren't always easy to recognize and companies (and their boards, owners, and stockholders) want stability and projections that they can rely on. Possible, but unproven, dependencies are not given enough weight to override that change of number in the spreadsheet.

     Let's take a number that is in every company's spreadsheet -- salaries. Increase salaries, decrease profits. That's what the numbers say -- once again, assuming independence between the numbers in the spreadsheet.

     The search, for the lowest salaries to be paid, leads to many things. How do you succeed in paying people less? Outsource to other locations that have lower wages. Pay just enough that there are enough desperate people willing to work for the wage. Eliminate safety measures, increase working hours without additional pay, intensify the working hours so the body and/or mind is always working at peak output and left drained and exhausted at the end of the day (crippling their ability to positively interact in any family unit). Lots of ways to wring the sponge.

     Lower wages equals greater profits -- that's what the spreadsheet says.

     But does that mean that higher wages equals fewer profits? You might assume so but here come the interdependencies. How much does attrition and turnover cost? Nothing directly -- but REPLACEMENT of those resources cost something. It costs a lot of something. Lower wages will lead to higher attrition and turnover (not that wages are the only criterion for such events). So, when you decrease that number in your spreadsheet, be sure that you increase the numbers for recruiting and training, and decrease the factors involved with productivity. And the more you decrease the salary number the more the other numbers have to change. A 30% attrition rate will cost more than twice that of a 15% attrition rate because you are not only increasing recruiting/training but constant turnover is a terrible thing for productivity.

     Productivity is related to more than salaries, of course. There are many factors and I won't even attempt to capture a majority of them within this blog. The takeaway is that productivity is a huge factor in profitability of a company and that concentrating on only one number independent of other factors is likely to be a very large mistake.

     Increased salary not only has an effect on productivity numbers but it also is a contribution to sales numbers. The more people who have money to spend on products, the more money enters the economic system so they can buy your products. Ignoring the distribution of people who have how much money -- the greater the number of people who can afford to purchase your product, the more you can sell. "Trickle up" is a real thing.

     Beyond that salary number, there are many other factors that involve treatment of employees, communities, and surrounding world. Some of those "soft" factors include equal treatment, positive purpose, comfortable work environment. good communication, and so forth.

     Profitable businesses recognize that racism, sexism, genderism, Xisms, and anti-Xisms all are counter-productive and hurt profitability. That can be shown easily within the spreadsheet based on productivity and sales. You don't want to turn away potential customers and, since creativity and abilities are well distributed within all of humanity, isms within the company will decrease the ability to produce and to compete.

     Closely related to "isms", harassment also decreases productivity and morale. Different from the "isms", harassment can, and does, occur within various groups and not "just" between groups. Positive treatment -- encouragement, acknowledgement, elimination of obstacles lead to improvement both within the individuals involved but also morale, productivity, and positive interactions with the customer base.

     The bottom line of this blog is that numbers within a spreadsheet are not independent. Doing the "right thing" can increase productivity, morale, positive interactions with the customer base -- which in turn leads to greater profits and dividends.

What's in a Number? : Quantitative versus qualitative

 

     We like absolutes. If a person is above age B then they are mature enough to vote, or to buy and drink alcohol or whatever. If they are below age B, then they are NOT mature enough to vote, or whatever.

     People know this isn't true. Such characteristics -- maturity, life lessons, family background have some correlation to age. An older individual will hopefully be more mature, and have more experience, that that SAME individual was at an earlier age. But comparing individual X at age B to individual Y at age B is entering the "apples to oranges" type of situation. Each person will develop at different rates depending on experiences, home environment, environmental (if you are growing up in a war zone you will certainly develop more quickly in certain ways -- or you will be on the casualty list). And development occurs in different aspects at different rates. One person may develop physically very quickly while their social maturity is very slow to develop. And another person may do the opposite -- they may have the physical aspects of someone small and weak but have considerable social abilities and maturity.

     Another number in great use is the Body Mass Index (BMI). Yet, it is generally acknowledged by health professionals, that the number (or number range) is only accurate for about 80% of the people. A BMI is calculated by the formula of weight divided by height squared -- or kg/m(squared). But not all weight is equal. A bodybuilder with lots of muscle will weigh more -- be more dense -- at equal size. A bodybuilder, or athlete with a lot of muscle, will have a higher BMI. The same is true for people with "big bones" (used a lot as an excuse but still can be true and depending on genetic heritage). The BMI calculation calls upon a certain composition of the body -- so much muscle, so much fat, so much bone. If any of these are not in the "expected" range, the BMI number will differ and not easily able to be used for any charts or evaluations.

     So, if people know it isn't true, why do we use these numbers? They are simple. Some people in the world don't know their precise birthdate but most people (especially in areas of the world where they have heard of, and use, BMI) know what their chronological age is. They have access to a scale to weigh themselves and a ruler to measure their height. It is simple -- and simple means fast and easy.

     Could it be done more accurately? Sure. For aspects associated with age, a team (I would never recommend just ONE evaluation) can evaluate various development criteria. A person may come out of such an evaluation with a range of "ages" -- some higher than their chronological age and other aspects lower than their chronological age. Which is cheaper and faster -- a battery of tests by experienced professionals -- or looking at a calendar? Not hard to guess, is it?

     The BMI is an attempt to give a fast and easy determination of body fat composition. But there are other ways to determine that much better than the BMI formula. One method is called a displacement test. Put someone into a tub of water and measure how much the water rises on the edges of the container. Calculate the volume displaced which is the volume of the person. Then use this volume along with the weight to determine density. Density can then be used to determine composition. A person with high body fat will have lower density. A person with "big bones" or a lot of muscles will have higher density. There are other types of tests which vary in accuracy depending on the experience and ability of the tester -- body calipers and so forth. The end aspect is that all they require extra time and extra experience and training. Some are less convenient and require special equipment. But they are much more accurate. Which is cheaper and faster?

     This would be a great big "who cares" if it wasn't for the fact that these numbers are integrated into laws, and insurance actuary tables, and health advisory brochures, and so forth. The numbers can still be useful -- but ONLY if their limitations are recognized and acknowledged. A bodybuilder that is given higher insurance premiums based on being "too fat" according to their BMI should be given the option of paying for a more accurate test (probably saving themselves a lot over the term of the insurance policy).

      And, when you read a news article, it is useful and much more fair to recognize the limitations of numbers. That person of "mature" age may truly be more fairly evaluated as a child. Everyone is different but it is easier to categorize them according to the numbers.

     Do you know other numbers that do not always work well but are used because they are easier?