Just say no?: believe it or not, turning down business can help your company grow

Entrepreneur, August, 1998 by Mark Henricks

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 2 5 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 Davila. 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.

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.

ROM BOOSTERS

One way to increase your company's ROM is to seek out and destroy ROM-lowering traits. Simons and Davila 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."