The Magic Diamond of Performance to Scale Your Business
Brendan McGurgan FCA explains the four facets of Sebastien Tondeur’s Magic Diamond of Performance, which has helped the MCI chief’s company scale at speed and generate annual revenue of over $500 million.
Sebastien Tondeur, CEO of MCI, has led the company on an incredible scale-up journey. From a team of 30 operating in his home country of Switzerland, MCI has grown to employ almost 2,500 across 60 cities in 30 countries. Today, the company has revenue of over $500 million.
There are, of course, many facets to this success, but I want to focus on the novel way Sebastien manages company performance.
The Magic Diamond of Performance, as he calls it, focuses on four areas:
Employee promoter score (eNPS);
Customer promoter score (cNPS); and
Sustainability (aligned to purpose).
Sebastien argues that you don’t need to measure and manage hundreds of different metrics. Instead, focus on these four areas and you will save time, energy, and resources. You will also remain acutely sensitive to the pulse of the business. Let’s look at each in turn.
Anyone leading a high-growth or scaling organisation understands the importance of financial metrics. As a Chartered Accountant, I am only too familiar with ROCE, ROE, EBITDA, ROI, APT, etc. Put just about any three letters together, and it will likely be an acronym for yet another financial measurement. The question, of course, is which should you focus on? Sebastien cites four, which combine to capture financial performance. This is positioned at the apex of the diamond.
1. Sales growth;
2. Gross profit margin;
3. Net profit margin; and
4. Cash headroom.
Sales growth indicates the sales team’s ability to increase revenue over a fixed period (current month vs prior month, current quarter vs prior quarter, current month vs same month prior year etc.) It is calculated as follows:
Sales growth rate = (current period sales – prior period sales)/prior period sales x 100
As a benchmark, a scaling company has average annualised sales growth of 20% over three years.
Gross profit margin
Gross profit margin indicates the amount of money remaining in sales after deducting the costs of goods sold. The calculation is as follows:
Gross profit margin = gross profit/total revenue x 100
Gross profit margin assesses how efficiently the company generates profit from sales. For example, suppose your gross profit margin is low compared to your peers in your industry. In that case, it may point to inefficiencies in your manufacturing or lost opportunities in terms of realisable sales price vis-à-vis the value you are delivering to your customers.
Net profit margin
Net profit is arrived at by deducting all company expenses (excluding the cost of goods sold) from gross profit. Net profit margin is the ratio of the net profit that is generated as a percentage of revenue. It indicates how much of the revenue you earn is actual profit. Here is the formula:
Net profit margin = net profit/total revenue x 100
Net profit margins vary by business size and industry. As a rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered good, and a 5% margin is considered low. A consistent net profit margin aligned with sales growth is reflective of a successful scale-up. Significant fluctuations in net profit margin while a company is growing is often symptomatic of deficient processes and systems capable of supporting sustainable growth.
There is an old saying in business: “sales is vanity, profit is sanity, and cash is reality”. This is very much the case in a scaling business, where cash is the fuel for growth. I led the finance function of a dot-com company through the boom and bust of the early 2000s. It was my first taste of industry, and it provided a lasting and salutary lesson in the importance of cash. It was there that I learned the golden rule: “s/he who has the gold makes the rules”.
Cash headroom refers to the difference between a business’s required monthly cash resources and the available cash resources. For example: assume a business must payout £1,000 per month to cover overheads and expenses. If, after payments from customers, it has £5,000 in the bank, the business has cash headroom of five months. To put it another way, if there are no further customer orders, there is sufficient cash in the bank to cover five months of committed overheads and expenses. In my previous business, we targeted a business KPI of six months’ cash headroom. Anything more would trigger a conversation about where to better deploy the surplus cash. Anything less triggered a deeper look at the reasons why. Are orders declining? Are customer payments late? Have we seen a general increase in costs?
Employee net promoter score (eNPS)
If people are the most important asset in business, then leadership should protect and nurture that asset. To do this, you need to know how happy your team is and how engaged they are with your business. Good business leaders want their people to bounce into their workplaces, to bring high energy levels and a keen desire to provide amazing service energy levels and a keen desire to provide amazing service to customers. A good leader wants to provide fulfilling, meaningful, vision-aligned work to the people they employ. One of the world’s leading experts on customer and employee loyalty is Fred Reichheld, the founder of Bain & Company’s loyalty practice. Fred created the Net Promoter System (NPS) in 2003 and since then, it has been used by a range of leading companies such as Apple Retail, Philips, Charles Schwab, Allianz, American Express and Intuit to generate extraordinary results. In essence, Fred’s work laid bare the link between loyalty and profits. eNPS measures employees’ willingness to recommend the organisation to others as a great place to work. It indicates engagement levels, motivation, and intent to remain with the company. It also uncovers the likes and dislikes of employees as they pertain to the company.
A STATE OF THE GLOBAL WORKFORCE REPORT PUBLISHED BY GALLUP IN 2017 SHOWED THAT 85% OF EMPLOYEES WORLDWIDE ARE EITHER NOT ENGAGED WITH THEIR WORK OR ARE ACTIVELY DISENGAGED.
How do you calculate it?
The genius of eNPS lies in its simplicity. In an era of survey fatigue, it provides an incredibly easy and efficient way to survey employees. First, they are asked one quantitative based question: “How much would you recommend working here to a friend or colleague?” The employee uses an 11-point scale from zero (not at all likely) to ten (extremely likely). Follow this up with an open-ended question: “Why do you feel this way?” Those who score between zero and six are detractors. They are unhappy, disengaged, and could be looking for roles elsewhere. Those who score seven or eight are passives. They don’t love working for you, but nor are they entirely disengaged. Those who score nine or ten are promoters. They love their work and won’t hesitate to tell everyone. The eNPS score for a period – typically a month – is calculated by subtracting the percentage of detractors from promoters, omitting the passives from the calculation. The score is then displayed as a number rather than a percentage.
eNPS: a worked example
There are ten employee responses in ‘Improve Your Workplace Inc.’: 3, 4, 5, 6, 8, 8, 8, 9, 10, 10. This equates to:
Four detractors (3, 4, 5, 6) = 40%
Three passives (8, 8, 8)
Three promoters (9, 10, 10) = 30% The calculation: 30% – 40% = -10
What is a good score?
Jennifer Willy, Editor at Etia.com, says that anything above zero is generally acceptable: “Different companies and organisations have different standards and benchmarks to measure their performances. But generally, a score between 10 and 30 is considered good while anything near 50 is excellent.”
Why is eNPS important?
A State of the Global Workforce report published by Gallup in 2017 showed that 85% of employees worldwide are either not engaged with their work or are actively disengaged. Disengaged staff are less productive and are more likely to make mistakes. Worse, negative attitudes can contaminate an otherwise positive workplace culture. Conversely, employees engaged in their work are more productive and tend to positively influence their teammates. Consequently, employee retention rates will improve, and your team will produce better results for your clients. To put it simply, happy staff means happy clients.
Customer net promoter score (cNPS)
Successful scalers are obsessive about delivering value to customers. They are consciously tuned into why they do what they do and how that impacts their customers’ lives or businesses. Assessing the customer’s engagement with you is critical. It helps guide and inform loyalty initiatives and overall brand-building, and it forms the third area of focus in the Magic Diamond of Performance.
How do you calculate it?
cNPS is calculated the same way as eNPS. It is defined as the willingness of customers to recommend a company’s products or services to others. Like eNPS, customers are asked a single question: to rate on an 11-point scale (zero to ten) the likelihood of recommending the company or brand to a friend or colleague. Based on their rating, customers are classified into three categories: detractors, passives, and promoters. As with eNPS, cNPS is found by subtracting the percentage of detractors from the percentage of promoters. The result will be a number between -100 and +100. A cNPS score above zero is considered good, as it indicates that your audience is more loyal than not, and anything above 20 is considered favourable. Bain & Co., which pioneered this methodology, suggest that above 50 is excellent and above 80 is world-class. These are general guidelines, however. A good cNPS will depend on the industry and country in which the business operates.
Sustainability (aligned to purpose)
MCI’s purpose is as simple as it is profound: “when people come together, magic happens”. This purpose permeates every part of the business and is the slide-rule for all decisions. The company may have pivoted several times in its evolution, but that core purpose – bringing people together to build communities and create experiences – has remained. Sebastien explains that with growth came a consciousness of the company’s impact on the world. As MCI’s reach became global, it began to understand that it could accelerate change and promote a more sustainable and inclusive society. Anchored by its purpose, the company’s goal is to encourage an active culture of care and responsibility, backed up by concrete actions. This forms the last area of backed up by concrete actions. This forms the last area of focus in the Magic Diamond of Performance.
Why is sustainability important?
A view common in SMEs is that sustainability issues are for governments and larger corporates, as smaller entities are simply too busy wrestling with the day-to-day demands of the business. Sebastien, however, sees sustainability as an enabler of company growth. “I don’t think we have a single under-25-year-old candidate that hasn’t asked us about the sustainability programme. I don’t even think it’s an option for any business. You just have to have an answer when the question is asked.” Sebastien is not alone in this view. Marga Hoek, author of The Trillion Dollar Shift, puts it like this: “Business for good is good for business”.
What do you measure?
Sebastien’s mantra is “think big, start small, scale fast”. It’s all about learning as you go. MCI used the UN Sustainable Development Goals (SDGs) to guide their sustainability initiatives, picking a small number of the entire 17 to make a start. “We give a lot to the community as a business – doing volunteer work, helping kids, working on cleaning projects… and then, over time, we became more sophisticated. Now, we have a large community of what we call sustainability leaders. They cover a range of areas – environmental, social, diversity, inclusion. Belonging is a big topic right now. I give them a budget, I give them approval, and I rely on them to give me recommendations. They communicate to the company and engage the people.” MCI’s sustainability journey, which started with a single small step, has become a hugely impactful sustainability strategy based on four SDG-aligned pillars: people, planet, profit and governance. For example, under the ‘planet’ pillar, the company successfully reduced its carbon footprint by 20% in 2020. And as Sebastien points out, the most sustainable companies are the least wasteful. Waste is tangible in some industries, but how do you reduce waste in a knowledge-based company? In my previous business, we put our pre-sales function under the microscope and found that only 7% of sales leads converted into sales orders at our worst. That’s 93% wasted effort in customer calls, follow-ups, budget quotations, design drawings etc. So we zeroed in on our customer conversion ratio and, over time, increased our conversion rate to 20% – not by generating new leads, but by becoming more efficient in processing the leads we already had. Have fun with this aspect of the Magic Diamond of Performance. You don’t need headline-grabbing initiatives or noble sustainability targets, not at the start at least. Instead, look for an area of your business where you generate waste and aim to reduce it. In so doing, you will leverage your people’s time and creativity. In time, this process will compound to greater employee engagement and productivity, customer advocacy, and an improved bottom line.
Sarah Kennedy is Vice-President of Global Marketing at Adobe Experience Cloud. She says: “The companies that will excel long-term are the ones that know it’s not just about shareholder value… it’s also about focusing on the customer and employee experience, and how those, in turn, contribute to society”. If you’ve found yourself drowning in the vast sea of performance measurement options, then the Magic Diamond of Performance could be the lifeboat you and your business need.
Brendan McGurgan FCA is Co-Founder of Simple Scaling, a company dedicated to inspiring, connecting and enabling ambitious leaders of SMEs to scale with purpose.